The financial integration of China: New evidence on temporally aggregated data for the A-share market

In the presence of de jure capital account inconvertibility, but in spite of high trade openness of China, existing empirical work, using daily data, has not found any evidence of international financial integration of its A-share market. In this paper we shed new light on this issue, examining a long sample of active trading, over 1992-2005, within the framework of a regime-switching error correction model, with a major focus on the role of temporal aggregation. With end-of-week closing prices we do not find any long run relationship between the Shanghai market and either the New York or the Hong Kong market, thus replicating previous findings. However, with weekly-averaged indices, up to late 1996, the Shanghai index was cointegrated with the S&P 500. Subsequently, this relationship broke down and a long run relationship with the Hang Seng index gradually arose. Information flows, as well as the prospects of de jure financial opening, and the growing awareness of valuation concepts among Chinese domestic investors, in the presence of identical fundamentals (multiple listing of Mainland firms), help explain the evidence of long run financial integration in spite of capital controls.