The Chinese slowdown’s impact on global markets : an empirical analysis -

Abstract

Reports of deteriorating Chinese economic activity have been affecting the performance of stock markets worldwide, from the Dow Jones Industrial Average to France’s CAC40 and Japan’s Nikkei. In fact, China has been experiencing a slowdown in the past few years, which resulted in a stock market bubble burst on August 24th, 2015 which lead to what analysts called “Black Monday”: The Shanghai stock markets dropped by a sharp 8.49percent, followed by more than a 1,080-point drop in the DJIA the same day and a 4.6percent fall in Japan’s Nikkei. Markets around the world suddenly redirected their attention towards Chinese markets and acknowledged the country as a new emerging superpower and a large economic influencer. We cannot help but think of the possible financial market integration that exists between China’s stock markets and markets around the world, which could help investors optimize their portfolios and increase their returns. In order to prove this theory, we build a VAR model consisting of time series representing the daily closing prices of the Chinese, NYSE, CAC40, DAX, Indonesian, Taiwanese, Japanese, GCC, and oil markets. We conduct basic tests on our time series including normality tests, unit root tests, etc. We then proceed to test for the cointegration existing between China and the groups of countries as well as for the Granger causality among them. The Johansen Cointegration test concludes that there exists a semi-strong long-term relationship between the Chinese markets and the world markets but no long-term relationship with any of the remaining regions. As for the Granger Causality test, it shows the existence of a unilateral short-term relationship between China and Indonesia only. This means that investors can use the Chinese stocks along with Asian stocks for portfolio diversification, however, Chinese stocks and world stocks (from the US, France, or Germany) cannot be included in the same portfolio as they are financially integrated.