The Diversification Benefits and Policy Risks of Accessing China’s Stock Market

Abstract

China’s stock market (the “A share market”) has a lower correlation with the global market and is less affected by international financial contagions than any other major economy. The inclusion of mainland China stocks into an international portfolio increases its Sharpe ratio. However, we find that Chinese stocks providing the most diversification benefits also carry the most policy risk for international investors. Holding Chinese stocks listed in Hong Kong does not reap the same diversification benefits. While global market integration and the increase in foreign ownership can diminish diversification benefits, mainland China stocks still provide valuable diversification opportunities for international investors up till the most recent time in late 2010s.