China’s Economy in the Post-WTO Environment

China’s Economy in the Post-WTO Environment

Stock Markets, FDI and Challenges of Sustainability

Advances in Chinese Economic Studies series

Edited by Lilai Xu

The book explores the implications of both the extension of the market into key parts of the Chinese economy and the integration of China into the global economy. The main focus of the book is on the role and nature of China’s financial system and its ability to transform enterprise and household behaviour and the performance of investment finance, notably in the context of a two-way flow of foreign direct investment. All the extensive chapters highlight the issue of sustainability – some see the incompleteness of market reform as a problem; others are more willing to accept a pragmatic blending of the operation of the free market and government intervention.

Chapter 1: Who is More Important – a Leading Power or a Close Neighbor?

Yi Zheng and Heng Chen

Subjects: asian studies, asian economics, economics and finance, asian economics, financial economics and regulation, international economics


Yi Zheng and Heng Chen INTRODUCTION The phenomenon of globalization has been gaining momentum in recent years and its rise looks to be irreversible, despite objections from some quarters. Globalization is a direct result of increasing interaction among the world economies, both developing and developed. In this context of increasingly substantial capital flows across national borders, integration among world stock markets has important practical significance for investors, as greater financial integration implies reduced opportunities for international portfolio diversification. Integration among world stock markets is also an important issue for financial policy makers since co-movement between markets can result in contagious effects whereby investors factor price changes in other markets into their trading decisions in an effort to form a complete information set, meaning that shocks in one market may be transmitted to other markets. Such contagion effects have been exacerbated by certain major events which have affected world stock markets in recent decades, such as the 1987 stock market crash, the Asian financial crisis (1997–98) and the global financial crisis of 2008. Correspondingly, individual countries’ monetary and fiscal schemes are being designed to tackle possible external infections. Among the international markets, China’s stock market – in line with its fast-growing economy – has become a rising star that has caught investors’ eyes. Initiated in the early 1990s, China’s stock market has a relatively short history; therefore, the interactions and relations between China’s market and other world markets have not yet been extensively investigated. However, despite its short history, China’s stock market...

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