Scandinavian Working Papers in Economics

Working Papers,
Lund University, Department of Economics

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 ()
Additional contact information
Mingfa Ding: Department of Economics, Lund University, Postal: Department of Economics, School of Economics and Management, Lund University, Box 7082, S-220 07 Lund, Sweden
Birger Nilsson: Department of Economics, Lund University, Postal: Department of Economics, School of Economics and Management, Lund University, Box 7082, S-220 07 Lund, Sweden
Sandy Suardi: La Trobe University, Postal: La Trobe University, Australia

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

JEL-codes: C23; G12; G18; G32

37 pages, First version: April 23, 2013. Revised: June 11, 2013.

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