XIAOYUE CHEN, BIN LI, TARLOK SINGH AND ANDREW WORTHINGTON |
As China cements its position as an economic leader in Asia, its policies ripple across the region, influencing markets in profound ways. A new study explores the predictive power of Chinese economic policy uncertainty (EPU) on stock returns in major Asian markets.
The study investigates the spillover effects of Chinese EPU on stock returns in Japan, Hong Kong, India, Korea, and Taiwan. By adjusting raw returns with asset pricing models, the study identifies market anomalies that traditional risk factors fail to explain.
Key findings
The study employs a rigorous methodology, using portfolio-level sorting analysis and firm-level Fama-MacBeth regressions, to analyse stock returns across Japan, Hong Kong, India, Taiwan, and Korea. Among the key findings:
- Negative predictability: Stocks with higher exposure to Chinese EPU in Japan, Hong Kong, and India exhibit lower future returns, particularly for large-cap stocks.
- A market anomaly: This relationship is not explained by traditional risk factors such as size, value, or momentum, making it a unique predictor.
- Market-specific dynamics: Taiwan’s stock market appears immune to Chinese EPU spillovers, while Korea shows a positive relationship driven by the value factor.
Implications for investors and policymakers
- New predictors: Exposure to Chinese EPU offers a novel lens for forecasting stock returns, complementing existing models focused on US uncertainty spillovers.
- Regional integration: The results underscore the deepening ties between Asian economies and financial markets, with China at the centre.
- Market-specific strategies: Differences in market responses highlight the need for tailored investment approaches that consider local dynamics.
Challenging the US-centric paradigm
The study challenges the traditionally dominant role of US economic policy uncertainty in predicting global stock returns. By presenting Chinese EPU as a robust intra-regional predictor, it reflects the shifting balance of economic power within Asia and reaffirms China’s influence on neighbouring economies.
Strategic takeaways
For investors, understanding the nuanced effects of Chinese EPU can provide a competitive edge in navigating Asia’s dynamic markets. Policymakers, on the other hand, can use these insights to better gauge regional economic sensitivities and formulate more resilient frameworks for economic integration.
This research not only provides investors with actionable insights for managing uncertainty risks but also sheds light on the intricate interplay between China’s policy decisions and Asian financial markets, offering a roadmap for navigating uncertainty in a region that continues to redefine its role in the global economy.
With economic policy decisions in China affecting regional markets more than ever, incorporating this predictor into investment strategies could provide a competitive edge in navigating Asia’s dynamic financial environment.
Associate Professor Tarlok Singh is a member of the Griffith Asia Institute. Dr Xiaoyue Chen is from the Buckingham Business School, The University of Buckingham, UK. Dr Bin Li and Professor Andrew Worthington are from the Department of Accounting Finance and Economics, Griffith University.
This article is a synopsis of a journal article “Economic policy uncertainty and the predictability of stock returns: impact of China in Asia” published in China Accounting and Finance Review, written by Xiaoyue Chen, Bin Li, Tarlok Singh and Andrew Worthington.
