The effects of the global financial crisis on the Shanghai stock market

Since the 1990s the Chinese financial market has experienced dramatic changes by virtue of the aim to consolidate the country's transition from a central planned economy towards a market-oriented one. China was able to create a respectable stock market from scratch in the early 1990s, and its performance has been characterised by better behaviour, when compared with other transition economies, regarding market fundraising capacity, liquidity and capitalisation levels. China's stock market capitalisation has become the second largest in the Asian region, after Japan. Due to the prominent role of the Chinese economy and the continuous development of both its stock market and financial system, this study focuses on understanding the effects of the global financial crisis on China's mainland stock market. Our analysis looks at contagion and/or spillover effects originating in the US stock market to understand how they impacted on the Shanghai Stock Exchange. We look to identify whether the Shanghai Stock Exchange is affected by global shocks or whether it is more prone to regional shock waves emanating from major local markets. Regional analysis focuses its attention on the Hong Kong and Singapore stock exchanges, well-established markets in the region with strong connections to the Shanghai Stock Exchange. Using the extended Forbes and Rigobon (2002) contagion methodology, this research finds significant evidence supporting the existence of spillover effects in the Asian stock market derived from the US. Nevertheless, our findings do not justify the existence of contagion effects running from the US or from the regional markets. Instead, the Hong Kong and Singapore stock markets appeared to be the ones affected by regional contagion effects. We also found that the Chinese stock market made a quick recovery after the global financial crisis, which could have contributed to the enhancement of contagion effects in the regional markets.