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Foreign Institutional Investors and Stock Market Liquidity in China: State Ownership, Trading Activity and Information Asymmetry

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  • Ding, Mingfa

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  • Nilsson, Birger

    ()

  • Suardi, Sandy

    ()

Abstract

The Chinese government has implemented the Qualified Foreign Institutional Investor (QFII) system in order to promote stock market liquidity by participation of foreign institutional investors. This paper is the first to explicitly identify the channels through which foreign institutional investors influence the liquidity on the Chinese stock markets. Firstly, we find that market participation by foreign institutional investors promotes liquidity both for state-owned enterprises (SOEs) and non-SOEs. Secondly, foreign institutions influence liquidity through the informational frictions channel, but not through the real frictions channel. Thirdly, as implied by these two results, foreign institutions are not informationally disadvantaged when investing in SOEs. Finally, the link between foreign institutional participation and liquidity remains strong before, during, and after the recent financial crisis.

Suggested Citation

  • Ding, Mingfa & Nilsson, Birger & Suardi, Sandy, 2013. "Foreign Institutional Investors and Stock Market Liquidity in China: State Ownership, Trading Activity and Information Asymmetry," Knut Wicksell Working Paper Series 2013/14, Lund University, Knut Wicksell Centre for Financial Studies.
  • Handle: RePEc:hhs:luwick:2013_014
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    Cited by:

    1. Ijaz Ur Rehman & Nurul Shahnaz Mahdzan & Rozaimah Zainudin, 2016. "Is the relationship between macroeconomy and stock market liquidity mutually reinforcing? Evidence from an emerging market," International Journal of Monetary Economics and Finance, Inderscience Enterprises Ltd, vol. 9(3), pages 294-316.
    2. Peranginangin, Yessy & Ali, Akbar Z. & Brockman, Paul & Zurbruegg, Ralf, 2016. "The impact of foreign trades on emerging market liquidity," Pacific-Basin Finance Journal, Elsevier, vol. 40(PA), pages 1-16.
    3. repec:ebl:ecbull:eb-17-00648 is not listed on IDEAS

    More about this item

    Keywords

    Liquidity; emerging markets; foreign institutional investors; real frictions; informational frictions;

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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