Monetary policy effects of the United States and the euro area on the Chinese financial markets

This paper documents and compares the effects of monetary policy announcements released by the United States and the euro area on Chinese mainland and Hong Kong stock markets. Using daily data, we apply the event study approach and the heteroskedasticity identification approach to carry out the empirical tests. We find a larger and more significant response from Chinese stock markets to U.S. monetary policy surprises than to the euro area monetary policy surprises. Meanwhile, we also notice a stronger reaction from the Hong Kong stock markets to shocks delivered by monetary policy decisions from these two areas, compared with the responsiveness of Chinese mainland stock markets. This paper also analyses and justifies these observations through five determinants to the international transmission of monetary policy effects: real economic integration, financial integration, exchange rate regime, openness of the economy and industrial composition. These findings suggest that, only considering monetary policy effects, international investors might create a diversified portfolio composed of assets in the stock markets of Mainland China and the euro area, and that the American monetary policy announcements could be considered as a risk to Chinese stock markets as well.