Bank share prices and stock market integration in Greater China

Abstract

This paper empirically analyzes the relationship between the Shanghai Stock Exchange (SSE) Composite Index and the indexes of 10 Chinese listed banks. In particular, we try to test whether the listing of these banks has played a role in leading the Chinese stock market boom during 2007. Using daily prices from 1 June 2006 to 15 November 2007, we found that a unidirectional causality relationship existed either way between most bank stock prices and the market index while the bidirectional relationship only identified among five of the ten banks. We also observed that the market indexes of SSE, Hong Kong and Taiwan followed a similar trend, indicating a possible cointegration of the Greater China stock markets, which was in part driven by the listing of Chinese banks.

Keywords:

• Shanghai stock exchange
• causality tests
• CSI 300 financial index

JEL classifications:

• G21
• G14
• C53

Acknowledgements

The research was supported by the Leverhulme Trust (F/00765/A) and the EU-China Financial Cooperation Project (EuropeAid 112901/C/SV/CN). The authors are grateful for the valuable comments of participants at the Chinese Economics Association (UK) annual conference held in April 2008 at the University of Cambridge.

Notes

1. The ‘Big Four’ refers to the four state-owned commercial banks that comprise ICBC, China Construction Bank (CCB), Bank of China (BOC) and the Agricultural Bank of China (ABC). The Bank of Communications (BOCOM) has been added to the four to form the ‘Big Five’, of which only the ABC is not listed. The names of the banks and their abbreviations are listed in the Appendix.

2. B-shares are foreign-invested shares issued domestically by Chinese companies. In addition, H-shares are listed on the Hong Kong Stock Exchange and are subject to its stringent listing and disclosure requirements. For a concise history of the recent development of the Chinese stock market and its regulatory regime, see Green (2004).

3. Both the Company Law and the Securities Law of People's Republic of China were amended in 2005 and became effective from 1 January 2006.

4. The SSE Composite Index plummeted to less than 2800 on 15 July 2008, after reaching 6092 on 15 October 2007. This huge market correction may imply large overvaluation of the stock market in the previous two years. It also reflects the extent of speculative behavior of Chinese investors who are largely driven by market sentiment rather than corporate performance. This paper does not cover this period of dramatic downturn in the stock market.

5. The SSE Composite Index is an index of all stocks (A-shares and B-shares) that are traded at the Shanghai Stock Exchange. The base day for the SSE Composite Index is 19 December 1990, and the base period is the total market capitalization of all stocks of that day. The base value is 100. The index was launched on 15 July 1991. The formula is as follows:

• Current index = current total market cap of constituents × base value/base period, Total market capitalization = Σ (price × shares issued).

6. CSI 300 Financial Index is composed of 38 stocks (from 2 July 2007 to 10 July 2007) of the financial sector institutions, such as banks, insurance companies and real estate firms. It is part of the CSI 300 Index series. The CSI 300 Index, which represents capitalization-weighted stock market index, is designed to replicate the performance of 300 most representative A-share stocks traded in Shanghai and Shenzhen Stock Exchanges.

7. Stocks of SDB and CCB are not included. CCB was listed on the Hong Kong Stock Exchange on 10 July 2007.