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Abstract

This thesis presents three essays on important developments that marked the Chinese financial sector in the past decade (2010-2020). All essays are related to the gradual liberalization of Chinese capital flows and new stock market schemes launched by China to facilitate greater investment in and out of China.

The first essay discusses the Financial Trilemma in China in the past decade (2010-2020), and the implications of the gradual opening of China’s capital account and the surge of capital outflows. The end of the Global Financial Crisis (GFC) indeed saw an important number of changes in China’s macroeconomic policy. After the GFC, China proceeded with gradual interest rate liberalization, started to target a basket of currencies for its exchange rate, and gradually opened its capital account. Those changes give us an opportunity to look at whether the Financial Trilemma’s constraint held in China during the last decade (2010-2020), and if so, what macroeconomic policy tradeoffs China faced. We find that policymakers in China do, indeed, face the trade-off among the three Financial Trilemma’s policy goals, that is the Trilemma’s constraint is binding. Second, we show that concomitantly with massive capital outflows (some US$ 1.6 trillion) observed from Q2 2014 until Q4 2017, China’s monetary policy independence deteriorated between 2015 and 2019. China’s monetary independence recovered to some extent in 2020-2023, but not to pre-2015 levels.

The second essay studies the impact on the implied cost of equity capital of firms of a liberalization scheme of the Chinese stock market, the ‘Shanghai-Hong Kong Stock Connect Scheme’ (launched on November 17, 2014), that allowed greater access by foreign investors to the shares of a large number of firms listed on the Shanghai Stock Exchange. Using a difference-in-differences method, we document a large but temporary impact. We further show that only firms in certain industries saw a fall in their cost of capital, and that among those select industries, only private firms (private mid-cap) saw a lower cost of capital. Averaged across all firms subject to the liberalization, the implied cost of capital fell by around 1.5%. But averaged across just the private firms in the affected industries, the cost of capital fell by as much as 4%. Nevertheless, even among the most affected firms, the impact was short-lived and disappeared within two years of the policy change.

The third essay examines the behavior of the Chinese stocks that were added to the Morgan Stanley Capital International’s (MSCI) Emerging Markets Index using a difference-in differences method. The essay studies the impact of both the MSCI inclusion announcement event on June 20, 2017 and the actual MSCI inclusion event on June 1, 2018. The inclusion of A shares into the MSCI indicates the gradual recognition by international investors for China’s efforts in the reforms and liberalization of its capital markets. We find little impact of the June 2017 announcement. After the actual MSCI inclusion on June 1, 2018, we find a short 9-month window (from June 1, 2018 until the end of February 2019) during which there is a temporary appreciation of MSCI stocks. However, these are reversed soon after, and are not long-lasting (even less permanent). This increase is economically significant (cumulative abnormal excess returns reach 10% in January 2019 before converging to zero in April 2019), and short-lasting. There is no impact in quarterly variance (neither temporary nor permanent) of the inclusion event. There might be a temporary impact (a reduction) in the quarterly variance of residuals (hence in idiosyncratic risk) of the inclusion event. Finally, following the June 1, 2018 MSCI inclusion event, we find a potential temporary increase in correlation of daily MSCI stock returns with daily China CSI Index returns, and a long-lasting (permanent) increase in correlation of daily MSCI stock returns with daily MSCI World Index returns.

Those three essays form coherent research around the gradual liberalization of the Chinese financial sector in the past decade (2010-2020). Each essay is pointing at China becoming more financially integrated with the rest of the world.

Publication Type:	Thesis (Doctoral)
Subjects:	H Social Sciences > HF Commerce H Social Sciences > HG Finance
Departments:	Bayes Business School > Bayes Business School Doctoral Theses Bayes Business School > Finance Doctoral Theses

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