Stock Returns and Volatility Dynamics in China: Does the Control of State-Owned Enterprises (SOEs) Matter?

Abstract

This paper examines the nature of equity ownership of state-owned enterprises (SOEs) for over 2000 listed firms in China. Notably, the paper examines both the pattern of state ownership and the dynamics of stock returns and volatility. Firms under the control of SOEs dominate the Chinese stock markets and currently account for over three quarters of total Chinese market capitalization. Central SOEs are focused in strategic industries, with firms in Shanghai eight times the size of counterparts in Shenzhen. Local SOEs, on the other hand, concentrate on pillar industries related to consumer goods and services. Furthermore, on average, SOEs have a controlling stake of 40% among listed firms, with much higher shareholding of Central SOEs among firms in strategic industries. We also report an increase in state control among listed firms when compared to earlier reported figures. This is contradictory to expectation that the Chinese government would be obliged to lower state influence following its joining of the World Trade Organization in 2001. In examining the behaviour of stock returns we find evidence of daily and monthly autocorrelations that are larger and of a different sign to that reported for Western markets. We also report evidence of volatility persistence but little evidence of volatility asymmetry, again in contrast to that often reported for other markets. Finally, we find evidence of either no or a negative relationship between returns and volatility (risk) that differs from our usual view of risk aversion. It is hoped, knowledge of these dynamics will increase our understanding of the Chinese equity market, which in turn is important for those engaged in international portfolio management and micro structure modelling.