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Department of Economics, Lund University Working Papers, Department of Economics, Lund University

No 2013:10:
Foreign Institutional Investors and Stock Market Liquidity in China: State Ownership, Trading Activity and Information Asymmetry

Mingfa Ding (), Birger Nilsson () and Sandy Suardi ()

Abstract: The Chinese government implemented the Qualified Foreign Institutional Investor (QFII) system in order to advance the quality of local capital markets by participation of foreign institutional investors. This paper identifies 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, 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.

Keywords: liquidity; emerging markets; foreign institutional investors; real frictions; informational frictions; (follow links to similar papers)

JEL-Codes: C23; G12; G18; G32; (follow links to similar papers)

37 pages, April 23, 2013, Revised June 11, 2013

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