Allen, Qian, Shan & Zhu: Explaining the Disconnection between China’s Economic Growth and Stock Market Performance

Abstract:

The size of the Chinese stock market is the second largest in the world. The poor performance of this market over the period 2000-2013, relative to developed and large emerging markets as well as unlisted firms in China, has been striking. This is despite the fact that the Chinese economy, the largest in the world in PPP terms, has been the fastest growing economy globally for the past three decades. We examine reasons for the disconnection between economic growth and stock market performance. Problematic IPO and delisting processes exacerbate the adverse selection of firms into the market. With much higher levels of investment compared to listed firms from the US, Japan, India and Brazil, Chinese firms generate lower net cash flows, implying low investment efficiency. Lower cash flows are associated with more related-party transactions for Chinese firms, indicating deficiencies in corporate governance.

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