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Chinese capital market

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Chinese capital market

Introduction
Motivation and research question
The aim is to show the behavioral elements of the Chinese capital market and act as reference for
the investors. So as to be able to identify whether the Chinese stock market is influenced by
various behavioral elements. The Chinese economic reforms are attributed to have largely
contributed to the development of the Chinese capital market which in turn enhances the
economic. In this dissertation we are going to focus on the overall picture of the Chinese capital
market in the theory of behavioral finance in relation to the current economic measures put in
place will be covered under the literature review. The other aspects that were not covered in this
paper will be discussed under the literature gap so as to broaden the research ground. The
discussion of the capital market data and various results will be covered under the methodology
and later accompanied by the explanation of the results and conclusion for the factors
discussed. The motivation behind this study is the fact that China has a rapidly growing economy
that continuously increases its overall market share in the international platform. This is a
significant achievement since it helps in building of political influence in international platforms.
Literature review
The concept of behavioral finance is mainly derived from the integration of finance and other
social science disciplines. This has brought out various aspects of the capital markets thus
enhancing ones understanding of the concept of financial markets. Famas literature review was
able to identify the core reasons behind the behavioral finance in that indifferences that were
discovered took a similar shape to that of the under reaction in that originated from investors
overreaction. Also Fama was able to identify that with improvement in the various

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methodologies in various studies and increment in time frame the various anomalies were able to
disappear. He was able to point out the wrong conclusion reached at by the psychological
perspective of the finance behaviors. He based the inconsistency in the anomalies to the lack of a
basic psychological principle that seems to indicate that individuals in all instances underreact or
overreact as presumed for the financial anomalies situation. Second to his criticisms is the fact
that frontier research in the wide range disciplines point out that the initial claims of findings that
are regarded as important are in most instances faced out by the findings of recent reaserch
carried out. Market inefficiency is able to suggest that that various stock prices do not display a
consistent pattern since stocks whose bid in on the rise by investors will reduce with time where
as those which have been underpriced will increase over time. This therefore attests the fact that
stocks are not easy to measure or predict as bubbles can either turn out positive or negative. The
theory of financial efficient markets was at its peak given the introduction of using coherent
expectations in the process of speculating asset prices. Financial theory is largely based on the
fact that various academic and financial analysts are of the notion that various investors act
rationally while taking in to account all details during the decision making process so as to come
up with efficient investment markets. This is largely based on the modern portfolio theory and
the capital asset pricing models (Drew, & Naughton, 2003).
Behavioral finance was seen as to have marked the clear shift from the use of financial analysis
that are accompanied by various time series analyses to the indulgence in development of various
psychological models that are based on human market behavioral characteristics. Given the
many anomalies behavioral finance is able to capture the various financial fluctuations. The
feedback models used for the financial market models is the price to price feedback mechanism
whereby through the increased speculative price investors to heighten the public expectations

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thus leading to increased behavioral characteristics. Efficient market theory has indicated
various flaws thus pushing for the employment of eclectic approach. The behavioral finance
know how is essential in the gaining of insight in various issues such as stock market booms
which witness their downfall afterwards given the fact that the behavioral characteristics of the
capital market resemble that of human weaknesses. There exists various human behavioral
theories such as prospect theory where by the basic human cognitive behavioral characteristic of
human beings becoming risk takers in times of loss and risk averse in times of benefit is a
regularity. This therefore influences people to place more emphasis in outcomes that are more
certain instead of those that are more probable. The manner by which various investors frame the
idea or problems in their minds is of great significance to the decision to be undertaken.
Current findings
Basing on the current findings the Chinese capital market has witnessed a steady rise in the GDP
figures with the three major aspects for the growth being investments consumption and export
values. The most significant contributor to the to the capital market is investment whereby an
increased number of investors lead to increment in the rate of scale participation in the china
capital market. This places the market as a significant platform for with effective wealth
management qualities that provide a secure ground for public investment to be undertaken. With
the optimization of the Chinese capital market in terms of the investor structure various
companies have been able to exploit the available platform this comprises of insurance and social
security companies. Corporate and other general agencies are the domi9nating forces in the
investor aspect of market capitalization whereas private sector and professional institution
investor comprising of the remainder respectively (Kleinbrod, 2006).

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The china capital market in relation to the current findings is shaped in a multi-level structure
whereby the various objectives of the market include the strengthening of the mainboard, coming
up with various strategies that swill ensure development of the various SME while ate the same
time advocate for establishment of the ChiNext stock market while at the same time ensuring the
establishment of the OTC market. This is reaching its realization given the fact that the number
of companies being enlisted in the Chinese capital market thereby increasing the total market
capitalization effectively. Currently the market is characterized by the increased intermediary
industries which are on the trading in huge figures for the net capital securities.
The development of a centered capital marketing regulation system is a significant development
towards the efforts being put in place to ensure improvement of the legal system being used in
the capital market. This is purported to effectively deal with the increased illegal activities that
are being experienced in the capital market. This enhances both accountability and transparency
so as to avoid the systematic risk associated. The Chinese capital market is deemed as to have
been comprised of self-regulatory organizations. This comprises of various exchanges, security
associations, stock exchanges and security investors protection funds (Kleinbrod, 2006).
Most of the Chinese financial lending institutions have been enrolled in the risk based lending
activities thus opening up new platforms that have not been exploited by chinas domestic
banking systems which in turn open up the nation to a wider investments platform. At the same
time china is heavily involved in external investments mostly abroad thus enabling its increased
industrial expansion given its increased dominance in the advanced technology, natural resources
and capital inputs.
Literature gap

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Chinese capital market

The gap in this research is the fact that behavioral based reaserch in the capital market is
effective in carrying out analysis of property. Therefore the aspect of human behavior becoming
increased in a segmented market may lead to information asymmetry. Human behavior influence
can therefore provide the proper strategy in the property investment sector so as to develop the
capital market. Properties have the same characteristics as the stock markets in that they apply
the ambiguity aversion biases and use under prospect theory so as to explain the existing
irrationality phenomena which is based on the various irrational belief models. With the
increased alteration to the property capitalization processes there exist increased investor risk
aversion given the volatility nature of the property market capitalization. Human heuristics
during the process of formulating a decision is a preferred strategy since it enables one to make
rational decision thus providing the amicable solution to the problem at hand. This suggests that
the research should consider the various forms of beliefs that are under uncertainty so as to
collectively sum up the various human judgments carried out under uncertainty.
Data and Methodology
The data on stock prices on the t average price in one quarter of the Chinese capital markets will
enable us look at the rapid expansion that is taking place and measures being put in place by the
Chinese stock market body so as to prevent the capital flows from destabilizing the Chinese
capital market. The Measures being undertaken include the establishing of separate share classes
whereby local investors trade separately whereas the foreign investors trade separately. The
foreign shares are traded at a cheaper price thus have a lower value comparted to the ones for the
residential. The sample selection covers a DataStream in between 2006-2009 of shanghai and
Shenzhen markets. This is also based on the size A and Size B share trading (Kleinbrod, 2006).

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The Fama French model can be used to test whether the efficient market theory can explain the
returns being experienced in the stock market. Efficient market theory is based on the fact that
beating the market is next to impossible given the fact that stock market efficiency makes the
current share prices to account and display all the information. This ensures that the investors are
able to trade shares at their fair price since they cannot purchase undervalued stocks or sell
stocks at higher prices. This therefore creates a capital market that cannot be easily outperformed
through selection or timing (Kleinbrod, 2006). the data provided the shanghai and Chinese stock
market for averaged stock prices in one quarter and earnings average of the last four quarters
will be used in testing of my hypothesis so as to identify whether the Chinese stock market is
influenced by behavioral elements. This data reflects the various decisions made by the
investors. I will try to integrate the data from book values of the stock that are calculated from
the financial statements while employing the Fama French model in the explanation(Kleinbrod,
2006)..
The sturdy will effectively employ the longitudinal study in that it takes the measurement of
similar sample within multiple time points. This gives the study an ability to exploit the
investors ability to solve various problems through carrying out of assessment in their behavior.
The behavior aspect cannot be subjected to experimental testing therefore making longitudinal
study the most effective methodology to undertake while conducting the research. In correlation
to the internet surveys carried out on various investors it will lessen the work load of trying to
find out the appropriate sample group.
The most key area of my reaserch methodology is carrying out of online research given the vast
material on surveys carried out on individual investors in the capital market. The surveys are
essential in that the investors feelings, behaviors and decisions can be easily assessed so as to

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determine the influence they had on to the decisions they made in the stocks(Kleinbrod, 2006)..
My survey will be focused on the investors in the Chinese capital market as the sample group,
this will enable me to achieve a wide range of investors over a short time frame. With a selected
sample group I will employ the mail survey technique whereby I will administer to them an
email attachment with various questions after which they will be expected to fill them and return.
This kind of survey is cost effective and will be able to cover the investor strategy assessment
thus proving to be vital in identifying the portfolio return of the investors. Dividend assessments
and capital appreciations will be easily assess from the investor through mail sampling survey. I
will be able to come up with relevant questions so as to touch on the main objectives of this
research in that the questions will be in line with research variables. Given the wide range
individual investors in the Chinese capital market it is essentially important to give a common
approach to the questionnaire being administered (Kleinbrod, 2006).
Empirical results
The average stock price in one quarter of the Shanghai stock significantly indicated rise in the
final quarter of 2006 while indicating consistency in the rise to 2007 then followed by rapid fall
in 2008. Theseis attributed to the behavioral characteristics indicated by the investors and the
general price bubble in the stocks. The fact that investors are behind the changes in the stock
prices the asset pricing bubble is definitely a reflection of the decision making process and
beliefs of the investors. The investors emotions are deemed to have played a significant role in
the bubble period as implied by financial markets state of mind. During the Chinese stock bubble
it is evident that investors emotions played a significant role in driving forth their decision and
the resulting decision which later resulted in stock prices leaving their fundamental value (Drew,
& Veeraraghavan, 2004).

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The Chinese stock market is underway a flexible given the various policies put in place so as to
restore investors confidence in the stock as indicated by the Shanghai stock exchange (SSE) data
in 2007. The fact that foreign investors had the capacity to mount pressure on the regulators so as
to secure QFII quotas easily impaired the capital market. The ability of the stock market to have
hedge fund was an added advantage in that the index was able to rise to 8.1% in the first moth
and indicated a rise by 3.1% in the following month. This showcased the impact of market
reforms had to the capital market thus indicating the behavior of investors during the reform
decision making process. Therefore market reforms acted as a strong reference for the investors
in the Chinese stock market to the point that the foreign and institutional investors were flocking
the stock markets (Kleinbrod, 2006).
Behavioral elements heavily influenced the Chinese stock market in that they bring out the clear
view of Eugene Famas empirical work where he attributed that in its weakest form capital
markets future returns cannot be forecasted basing on the markets past returns or any other
associated attributes. Also in the semi strong markets the various market prices project the
information that is in the public domain with regards to the economic fundamentals and all the
financial content available. Lastly the model indicates that for the capital market in its strong
form the prices project the existing public and private information that exists. This enables the
stock to capture prices as in the SSE scenario. The Shanghai stock bring the aspect of subjecting
each to earn equal regardless of the privilege of their information (Liu, 2010).
The RF-RM model in the Chinese capital market is effective when carrying out analysis of the
beta correlation in the Chinese stock market returns due to the smaller stock proxies. Given the
Chinese capital market portfolio the cross sectional and average returns can be estimated. This is
attributed to the fact that there exists many small market portfolios which control about 360

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billion dollars of funds therefore have had great impact to the market falls being experienced.
The prediction of stock results in B-share index is easier compared to the A-share index in
addition the level of efficiency in the Chinese capital market is lower compared to that of other
developed capital market thus it accounts for the deficiency incurred during the spreading of
information. The inefficiency has therefore led to the lack of adequate transparency being
experienced in the capital market (Kleinbrod, 2006). Shanghai and Shenzhen stock exchanges
suffer from the January effect whereby focus is created on both monthly and daily share returns.
This therefore account for the anomalies in the Chinese capital market where shares higher
shares trading is witnessed on Friday thus nurturing a short term trading behavior among the
investors. The results of the described statistics used in carrying out predictions indicate that both
the shanghai and Shenzhen stock exchanges there emerges various indifferences between the size
A and size B in that Size A tends to generate a higher number of returns when compared to size
B. this also accounts for the volatility of stock return of shanghai stock exchange being higher
than that of the Shenzhen stock exchange. Therefore it makes it impossible for the both the stock
markets to be in line with normal distribution thus bringing a skewed effect in the
values(Kleinbrod, 2006)..
The test carried out on the January or the calendar effect given the fact that this capital market is
a weak form efficient derived as a result of randomness in stock prices were based on a null
variable hypothesis. The null hypothesis projected the effect in that all coefficients are equated to
zero. The results for this basing on the average price in fourth quarter of Shanghai Shenzhen
stock prices The A share and composite market indicated an increased in returns compared to
those of B markets. A precise look on the month of Aprils stock returns indicate an emerging
conflict to the January effect presumed in other stock markets such that the Chinese stock market

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tends to generate positive during April compared to January. In the daily returns perspective the
stock suffers negative returns in Monday but experiences a steady rise during the week thus tend
to inhabit a more predictable market behavior (Brien, 2007).
In conclusion in line with the efficient market hypothesis the Chinese capital market portrays a
weak form of EMH. Chinese market is significant for this study since the market is getting more
developed as a result of the quick growing Chinese economy with the availability of equitable
market. This enables on to understand the market behaviors and investor decisions being made.
The carrying out of human element assessment in the stock market is essential since the investors
are referred as a result of their behaviors and relates to the strength the behavioral elements have
to the capital market. The time series and cross sectional evidences discussed above are able to
account for the distinctions between the size A and Size B share prices given that local investors
pay about four times as much as the foreign investors.

References
Brien, J. (2007). Private equity, corporate governance and the dynamics of capital market
regulation. London: Imperial College Press.
Drew, M. E., & Naughton, T. (2003). Asset pricing in China: evidence from the Shanghai stock
exchange. Brisbane: School of Economics and Finance, Queensland University of
Technology.
Drew, M. E., & Veeraraghavan, M. (2004). Pricing of equities in China: evidence from the
Shanghai Stock Exchange. Brisbane: School of Economics and Finance, Queensland
University of Technology.

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Kleinbrod, A. (2006). The Chinese capital market performance, parameters for further
evolution, and implications for development (1. Aufl. Ed.). Wiesbaden: Deutscher
Universitats-Verlag.
Liu, C. (2010). Chinese capital market takeover and restructuring guide. Alphen aan den Rijn,
The Netherlands: Kluwer Law International;