To What Extent the Chinese Stock Markets are Efficient - Research Paper Example

THE EFFICIENCY OF CHINESE STOCK MARKETS By + Introduction China has one of thefastestgrowingeconomies in theworld. Theeconomy has immensely developed in thelast one decade with more than 100% Gross domesticproduct. The growth is realized due to increasing in technology andinnovation within chinaeconomy over thelast one decade. China has thehighestpopulationacrosstheglobehencereadymarketforbothdomesticcommoditiesand imports becausedemandmeetssupply. It is in chinawhereciviland electrical engineering has foundroots in therecentpast. Anciently, Korea wasbelieved to be theinventor of electrical innovationsbut with time, china has beenwitness to takethelead in technology andinfrastructure. High population has also ensured supply of skilled labor is plenty within the Chinese economy (Fung, 2002). Chinese people are well known for their fastness and commitment in doingactivities. Itwas firstly witness in China wherethecurfewswereconducted on peopleworkinglate in thenight, before theindustrieswastransformed to a 24hour economy. Due to their hard work and innovation, they have emerged to be amongst thewellperformingeconomies in theworld. Chinese people have grown to the extent of exporting their civilengineeringskills to variouscountries within and outside the Asian continent (Rogers, 2007). They offer cheap services that are of highquality as compared to otherdevelopedcountries. China has a highfavoured in terms of mineralsandresources, whichincludethingssuch as crudeoils, iron, and copper. Themainsource of revenues in Chinese economy is Exports. Chinese peopleproducemore than whatthey domestically consume. Their exports come from domesticsurplus. Banks have come in within China economy to help in theflow of income. Banks have financed viable business ideas amongst the Chinese entrepreneurs in order to exploittheavailableresourcesfor their benefits, as well as theworld as a whole. Investment has flourishedfollowingthereadilyavailablecapital from banks that is offered to lowerrates. Thegovernment of China has contributed by its initiativescreatingenablingenvironmentforinnovationandbusiness. Chinese government has increased its publicrelations with othercountries in an effort to createmarkets to its citizen. Thegovernment has alsodevelopedfinancinginitiatives of offeringcapital to potential investors at relativelyverylowcost of processing andrepayment. There are two majorstockmarkets in china’s economy. Thesemarketsincludethe shanghai Stock Exchange and Shenzhen stockexchanges. These stockmarketswereinaugurated in 1990 and 1991, andtheyhaveemerged to be to among theleadingstockmarkets in terms of Market capitalization, specificallythesecondlargest after Japan. Theonlydifferent between Shanghai stockexchangeand Shenzhen has beenthecurrency of trading. In Shenzhen stockexchange, thetransactionsare carried out in Riminiwhilefor Shanghaialltransactions are done by use of US dollar. Combination of the When itcomes to thecomparison with other Stock exchanges in theworld‘s economy, the two markets are combined to marketformsthegeneralchinaeconomywherealltransaction is foruniformity. Literature Review The Chinese stock Markets havelisted over 1500 companiesin their stockexchanges. Thesechinamarketsrevealsomeexclusive “Chinese characteristics” that are unusual in otherstockexchanges. Theexclusivecharacteristic has required researchers to scrutinizevariouscorners of thestock Markets since that none of referencepointorgenerationexists. To begin with, theform of ownership of thelistedcompaniescan be categorized into five differentclassestheseincludelegalpersonshares, Tradable A-shares, state –ownedsharesandsharesand that are onlyavailable to foreign investors.Secondly, the tradable A and B shareare formed by the dominance of individual investors in Chinese likeinsurancecompanies, pensionfundsandsecuritiescompanies that contribute to less than 9% of theentiremarket capitalization. Thesecharacters in the Markets behave like Casinos without putting into theconsiderationthe fundamentals orinformation that is associatedtothe firm. Anotherfunnything about chinastockmarkets is thatbothshares of A and B havesimilarandidenticalownershiprightsanddividends in thesamecompany. Thesimilarlyimpliesthatforeign investors payfewerpricesforidenticalshares as compared to their Chinese counterparts. The current segment contains analysis of previous researchers that addressed the weak form efficiency of Chinese stock markets. Our discussions highlight their majorweaknesses in mainlythe toughness of resultsand methodologies employed. For most, the efficiency findings reported by various authors for both Shanghai Stock Exchanges and Shenzhen Stock Exchange. For A sharesmarkets in both Shanghai Stock Exchange for A and B sharesmarkets in Shanghai Stock Exchange are quiteastonishinggiventhe broadly sharedinsightthatthese Chinese stockmarkets are highlytentative, drivenlargely by marketrumours’andindividual investor attitude.Stockreturns that are correlatedis as a result of noisetraders. Forinstance, when noise traders ‘strategies is positive the prices will go up thusearning a positivereturns autocorrelation in theshortrun. On theotherhand, their evidence is contrarywithstudies that investigatethereturns ofpastreturn that is based on investmentstrategies in theexchangemarket in china. In 2010, The Shanghai Stock Exchange (SSE) experienced an annualloss of over 62%, dropping 2769 pointsandranked among theworstperformingmarket in thecontinent Asia. Noreservation, themainmission of the SSE is to supportfirmness in marketimprovement of the firm. Shanghai, is a city in the east which is knownfor a verylongtime to haveclosetieswestern in zone, has been a global businesscentre, buttheirony is that Chinese capitalmarket in located in Shanghai is not considered in internationalstockmarkets.To attain Chinas ambition to build Shanghai as an internationalfinancialmarket of sharesandshippinghub by 2022, Shanghai is making effort to increase more classy investment products, present favourable tax policies to draw international investors, construct a multi-layered financialmarketstructure, andupholdtheestablishment of financialservices in thecity (Walter, 2006). Investor’s hold the thought of enhancing Shanghai into an international financial centre, which resulted in an instant Shanghai index of 3.1% increase to 2465.76. One achievementtonote is, forthefirsttimeyet, China will letforeigncompanieslist in Shanghai. Foreigncompanies would be permitted to raisemoneythroughthe Shanghai Stock Exchange andalso to issuebonds in China. This could implynewterritoriesfor firms that are interested in extending their business to Asia or China markets. Asthechina that is thethirdlargest in terms of economyopens up globally, its financialsystemexpandsandtheparties of thefinancialworld will becomemore interrelated as one (Zhu, 2007). Forinstance, it is reported statistically significantabnormalprofitsforsomeshorthorizon contrarian and intermediate-horizon momentumstrategies in the A-shares market. Based on 412 technical trading rules, the first rule focused on predicting the stock price changes in the two markets of the Chinese economy. The price prediction gave an allowance to thetraders to makepossiblemaximumprofits in the 1990s.thesecondruleonChinesestudy that employedconventionalandfamousefficiencytest that has defectandneed to be corrected. Several researchers drew their conclusions basing on theoutcome of serialcorrelationandrunstestsalone. According Monte Carlo experimentsdone by a researcher provethattheabovestatisticalexperiment are lesspowerfulcompared to thevarianceratiotests in thedetection of serialcorrelationsreturns on stocks. Moreover, random walk hypothesis cannot be detected only on unit root, hence can prove the efficiency of the prevailing stock market since unit root tests are not suitable to predictchangesofstockprices. As a result, most researchers’ eitherpreferredand relied on thevarianceratiotests as opposed to unitroot in their empiricalresearchtesting of therandomwalkhypothesis. Unfortunately, emergingofchinastockmarkets which are typically characterizedwiththintrading, thintradingintroduceelement of bias into thestockexchangemarketefficiency based on autocorrelation test. Itis wellestablishedthatthintrading will bringaboutfalse autocorrelation in marketstockreturns that is vagueanddo not reflectthetruevaluebut an illusion. To the Surprise of many, there is no attempt to remove the effects of thin trading by early scholars; though some few scholars did acknowledge that thin trading is a culprit and cannot be detected easily in their studies (Zhong, 1996). China takes precaution before taking whatsoever rout. To build start-ups, China has keenlyestablished Growth Enterprise Market (GEM), which is technology-based, an experimental and Nasdaq-style stock market. It is limited to moreestablished firms that havemetqualifications of being in thetoplist. Judgmentis based on openplan of GEMpossibly in 2009: on the Shenzhen Stock market Shenzhen has conventionally been a tryingarenafornewinitiatives before theywereincorporatedtothebroadermarket. With thepastmemories of 2006/2007 SSEs Investors are keenbutstayinterested in thestockexchange investment.. During the period of recession, 300% gain while most companies lose their value. ; And it all took place when the Chinese economy still had an increase of 9% in 2008 (Samuels, 2014). Earlier Chinese efficiencystudiesassumedthat there is a staticfeature that will not change in theend, anditemerged from a randomwalk. Thestaticfeature will remainforthenearfuture. Theconclusionderived from autocorrelation-based is on a shallowgrounddue to two majorcriticisms: first, at theoutset, mostemergingsmallmarket in thestockexchange is due to thintradingbecause of autocorrelation. ; Secondly, returns can take a linear as well as non-linear series thus; we cannot conclude efficiency with one outcome. Thestockexchange will never be efficientin both the short run and longrun. With thelimitation of paststudies, thecurrentpapertries to examinethelimitation of efficiency of two stockmarkets in Shanghai and Shenzhen. Recommendationsand Findings Finding is put in a summaryforthemarkets as follows: with theattempt to correctthintrading, there is stillexist a problem of adjustment of returns in bothchinamarket. Secondly, nonlinear correlation occurs more often as compared to the linear correlations, andthecorrelationjustifiestheneed to examinethe nonlinearity whenstudyingthe weak-form efficiencyinthestockmarket. Thirdly, not all thetimethemarkets are efficient. Specifically, their adjusted returns of marketsharesfollow a randompathforlongperiodsusuallymore than a year, only to be combined with shortperiods of strong linear anddependencystructures. This implies that not all time the prices of shares reflect the information in the market of exchange. This evidence does not represent a rejection of the EMH that is a weakerform. Empirical results view market as a continuous variable that adoptmarkethypothesisfor a betterefficiencyframework. Anothernewinterestingfinding of china is thattheexistence of dependencies in the two markets of Shanghai and Shenzhen Stock Exchanges following one anothercarefully after October 1997 (Zhen, 2013). Conclusion To affect political, social and economic institution, the two markets in china should respond in a similar manner. In accordance with themarket expectation, there are disadvantagesinusingthepaststages of marketdevelopment. However, the shortcoming appears less regularly when the market gets to maturity over a period. The market is associated with a set of law that regulate the behaviours of individuals in the stock market during the third Development stage. However, furtherempiricalresearch is necessary to proveifthelegalenvironment is important in thestockexchange. The investigations made possible with information and data delivered by the law and finance society. Specifically, this will callforextendingthepresentagenda to a broad cross-section of manynations, andfindthenew of thefactors that contributed to thedifference in thenation’s number of windows that havesignificantdependencies.Theotherprospective determinants with accessible country-level records are therate at which stockmarketdevelop, market liquidity, changes in returnsandtheextent to which stockmarketopen to theoutsideworld. The stock markets in China have gradually grown their efficiency due to government involvement by setting the qualification of the company to be listed in the stock exchange. The government has had to put up high qualifications that have maintained only the major and capable companies in the stock exchange list. This has ensured competence stock exchange market that is of the same standards with the prevailing world-class stock markets. The qualifications based on the capital of the business and its market shares both domestically and internationally. This has also acted to increase efficiency in these stock exchange markets. By efficientitimpliesthatthecost of issuance of sharesandpayment of dividends by differentcompanies is veryconsiderate to thecost of capital References CHINA.,& ECONOMIC RESEARCH CENTRE (CHINA), CHINA. (1981). Almanac of Chinas economy.Hong Kong: Modern Cultural Co. DIJK, M. P. (2009). The new presence of China in Africa. Amsterdam: Amsterdam University Press. FUNG, H., & ZHANG, K. H. (2002).Financial markets and foreign direct investment in greater China.Armonk, NY: M.E. Sharpe. GROENEWOLD, N. (2004). The Chinese stock market: Efficiency, predictability, and profitability. Cheltenham, UK: Edward Elgar. HAUGEN, D. M. (2006).China. Detroit: Greenhaven Press. PETRAM, L., & RICHARDS, L. M. (2014).The worlds first stock exchange. ROGERS, J. (2007). A bull in China: Investing profitably in the worlds greatest market.New York: Random House. SAMUELS, C. (2014). Technology in ancient China. Shanghai Stock Exchange news. (2000). (ProQuest.)New York, NY: PR Newswire Association LLC. SOLMAN, P., LEHRER, J., CHENG, S., & FILMS FOR THE HUMANITIES & SCIENCES (FIRM). (2006). China rising. Princeton, NJ: Films for the Humanities & Sciences. STOCK EXCHANGE OF HONG KONG., & SECURITIES AND FUTURES COMMISSION (HONG KONG, CHINA).(1995). Consultation paper on the Stock Exchange of Hong Kong Limiteds procedures for reviewing directors suitability.Hong Kong: Working Party. WALTER, C. E., & HOWIE, F. J. (2006).Privatizing China: Inside Chinas stock markets. Singapore: John Wiley & Sons (Asia. WOOD, C. (2006). The bubble economy: Japans extraordinary speculative boom of the 80s and the dramatic bust of the 90s.Jakarta: Solstice Publishing. ZHEN, Y. (2013). Chinas Capital Markets.Burlington: Elsevier Science. ZHONG YANG YIN HANG.,&ZHONG YANG YIN HANG. (1996). The central bank of China: Purposes and functions (1961-1991). Taipei: Central Bank of China. ZHU, S. (2007).Securities dispute resolution in China. Aldershot Hants England: Ashgate Pub.Co. Read More