Chapter 5: Development and international diversification benefits of equity markets in China, Hong Kong, and Taiwan
The effectiveness of international diversification has been well documented in rich economies.1 However, the potential economic value of international diversification to investors in developing countries has not yet received the attention it deserves from academia. Among emerging countries, the development and interaction of financial markets between China, Hong Kong, and Taiwan differ notably from the others. Since the late 1980s, there has been an increase in the cross- Taiwan Strait economic integration between China and Taiwan, which is evident from broad economic indicators such as trade in goods, services and investments. The growth of the Chinese economy and the development of China in the global production chain network drive the economy in East Asia, particularly the ‘Chinese region,’ increasingly interdependent with each other. On the other hand, the dynamics of economic interdependence in this region has been accompanied by time- swinging military and political tensions. Thus, several critical issues emerge: What international diversification benefits local investors in the Sino market? Do the benefits of regional diversification vanish in their home region? Do the economic values generated by internationally diversifying portfolios shrink as the economy is increasingly integrated? If the benefits still exist, do their effectiveness to local investors diverge across China, Hong Kong, and Taiwan? Because of its rising economic importance and wealth accumulation, understanding the diversifying strategies and benefits in this Chinese- cultural region has become an indispensible element in global asset management.
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