Comprehensive case study: Financial market of China and its relationship with other Asian markets

Abstract

The primary objective of this paper is to study the current condition of the Chinese financial market and present evidence on the linkages it has with other Asian countries. These linkages have changed post the Asian Financial Crisis (AFC) of 1997 and the Global Financial Crisis (GFC) of 2008. With time the market linkages between China and other Asian countries has grown stronger for equity markets and remained weak for the bond markets. The strong equity market linkage evidence is consistent with the growing liberalization of Chinese equity markets and the increasing business and trade relations in the Asian regions. This evidence can be observed by the trend of increasing correlations for the equity markets post the crises of 1997 and 2008 between China and Asia. The stability of Chinese financial market during crises developed the trust of foreign investors in it. This trust was due to the capital controls, regulations on equity markets and other reforms which has cocooned it from the external market fluctuations. The growth in equity market linkages is also complemented by the decreasing correlations of Asian equity markets with U.S post-GFC. Further, the weak bond market correlations indicate the underdeveloped bond market in China with heavy restrictions, regulations and lacks depth and breadth in the variety of bonds. In this paper, we have also looked at the reasons which can contribute to the success or failure of RMB in becoming a global reserve currency.