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Foreign institutional investor trading in Chinese A-share markets

Peng Wang (Department of Finance and Statistics, Hanken School of Economics, Helsinki, Finland)

Managerial Finance

ISSN: 0307-4358

Article publication date: 7 October 2014




This paper addresses the topic “The interaction between financial institutions and firms in the nonfinancial sectors” in the special issue of “Banking and finance in China.” The purpose of this paper is to examine the trading behavior and price effects of foreign institutions under the celebrated Qualified Foreign Institutional Investor (QFII) scheme on all non-financial firms in the Chinese A-share markets.


Using quarterly equity-level foreign institution transactions from 2005Q1 to 2011Q4 in the Chinese A-share market, the author finds a positive and significant contemporaneous relationship between foreign flows and equity returns. For each quarter, the author sorts the stocks into ten portfolios based on the percentage of foreign flows, and employs the bivariate vector autoregression (VAR) model to examine the contemporaneous association in detail.


Foreign institutions in the Chinese A-share markets do not show positive or negative feedback trading; however, their flows have a strong impact on future equity returns because of informational advantage. Additionally, different associations are found between foreign flows and equity returns.

Research limitations/implications

Constraints on data availability exist, and a quarterly dimension is too coarse to provide a statistically precise result, although certain related papers use quarterly dimension data. Further research is required using higher frequency data.


This paper provides a first look at foreign institution trading patterns and price effects on local equity returns in the Chinese A-share markets. Additionally, the equity level data allow the author to exclude the stocks that were not bought by foreign institutions and to detect the “pure effect” of foreign flows on equity returns.



The author thank an anonymous referee, Zuzana Fungáčová, Timo Korkeamäki, Iftekhar Hasan, Martin Holmén, the workshop participants at the Hanken School of Economics, PhD workshop on Corporate Governance in Finland, the BOFIT seminar at the Bank of Finland and the conference participants at the Spanish Economics Association (SAEe) annual meeting in Santander for their helpful suggestions on early versions of this paper. This paper was previously circulated as “Big fish in a big pond: Foreign institution direct investments in Chinese A-share markets.” Financial support from Wallenberg Center for Financial Research and Hanken Foundation is gratefully acknowledged. All remaining errors are the authors.


Wang, P. (2014), "Foreign institutional investor trading in Chinese A-share markets", Managerial Finance, Vol. 40 No. 10, pp. 1007-1023.



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