A Liberalization Spillover: From Equities to Loans
The opening of equity markets to foreign investment appears to generate an enormously large positive growth effect (see Bekaert, Harvey, and Lundblad, 2005) in spite of a relatively small role of such markets for financing investment in most economies. We propose a possible spillover channel from equity market opening to lower costs of bank loans, which helps to explain this puzzle. From analyzing bank loan data associated with China’s introduction of the Qualified Foreign Institutional Investors (QFII) program, we find significant support for this channel. Furthermore, we show that a reduction in the risk premium is an important mechanism.
We thank Geert Bekaert, Anusha Chari, Wei Xiong, Xiaohui Zhang, and seminar and conference participants at Australian National University, Columbia Business School, Monash Macro-Finance Conference, University of Adelaide, and Chinese University of Hong Kong – Shenzhen for their useful comments. Zhou thanks the University of Melbourne’s FBE GRATS scholarship for financial support. The authors alone are responsible for any errors and omissions. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
I am an independent director of a large mutual fund company in China. This research received no funding from any organization or person other than my university research budget.Yifan Zhou
I thank the University of Melbourne’s FBE GRATS scholarship for financial support.