The Three Musketeers Relationships between Hong Kong, Shanghai and Shenzhen Before and After Shanghai–Hong Kong Stock Connect

Andy Wui-Wing Cheng,Nikolai Sheung-Chi Chow,David Kam-Hung Chui,Wing-Keung Wong

doi:10.3390/su11143845

Abstract

This study examines the sustainability of financial integration between China (represented by Shenzhen and Shanghai) stock markets and Hong Kong stock market over the period of pre and post launch of the Stock Connect Scheme. This paper aims to fill the gap in the financial literature by providing empirical research on the dynamics of the financial integration process, and examining the sustainability of financial integration among the three Chinese stock markets. We apply cointegration and both linear and nonlinear causalities to investigate whether the Shanghai–Hong Kong Stock Connect has any impact on both market capitalizations and market indices of Hong Kong, Shanghai, and Shenzhen markets. Through cointegration tests and linear Granger causality techniques, it was found that the stock markets from mainland China are increasingly influencing the Hong Kong stock market after the introduction of the Stock Connect Scheme; however, when using nonlinear Granger causality analysis for confirming China market dominance, the result shows an reverse relationship whereby the Hong Kong stock market is still relevant to understand and predict China stock market after the introduction of the Stock Connect Scheme. Overall, our findings support the view that the Shanghai–Hong Kong Stock Connect has a significant impact on both market capitalizations and market indices of the Hong Kong, Shanghai, and Shenzhen markets, but Hong Kong stock market is still relevant to understand and predict China stock market after the introduction of the Stock Connect Scheme. The change in share premium difference between mainland China’s domestic A-share markets and Hong Kong’s H-share market could change investors’ appetites or sentiments. Further research includes examining whether there is any functional relationship including nonlinear relationship and studying the dynamic drivers of the relationships.

Highlights

Stock market integration is an area of considerable interest and debate among academics and market practitioners
We use cointegration, linear and nonlinear causalities to investigate whether the Shanghai–Hong Kong Stock Connect has any impact on the market capitalizations and market indices of the Hong Kong, Shanghai, and Shenzhen markets
The null hypothesis that the series is non-stationary cannot be rejected for market capitalizations, market indices, and for all markets in both periods

Summary

Introduction

Stock market integration is an area of considerable interest and debate among academics and market practitioners. With regard to mainland China, where there has been continuous financial reform in terms of market deregulation and an aggressive pro-growth strategy, integration with neighboring markets has intensified, and whether integration can sustain better, in particular with Hong Kong. In May 2007, the QDII scheme, which initially permitted Chinese institutions and residents to invest in fixed-income and money-market products overseas, was widened to include equity products in designated stock markets. These two arrangements have further increased the integration of mainland China and Hong Kong. Less volatile and sensitive responsiveness indicate improved stock market efficiency among the markets due to improved regulatory frameworks and better macroprudential policies, thereby enabling the more efficient absorption of market information [5]

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