The efficiency of the Chinese stock market and the role of the banks

This paper examines the weak market efficiency and the role of the banks in the Chinese stock market. We consider both A and B shares traded on the Shanghai and Shenzhen stock exchanges using daily data for seven indexes for the period 1992–2001. We begin by an examination of the weak EMH and find evidence of departures from weak efficiency in the form of predictability of returns on the basis of their own past values. Over the period as a whole this was most marked for the B shares in both the exchanges and absent altogether in the index for the 30 leading stocks on the Shanghai market, suggesting that previously reported predictability may simply reflect thin trading. We go on to examine whether the efficiency was affected when banks were excluded from the stock market in 1996 and subsequently re-admitted in early 2000. We find that efficiency tended to be adversely affected when the banks were excluded.