Contagion or Real Linkages? Some Evidence from China's Emerging Parallel Markets

This paper empirically tests the existence of contagion using data on China's five parallel markets with different entry barriers for foreign capital. Taking the 1997 stock market crash as our experiment and using data on A, B and H shares, red chips and American depository receipts, the present paper tests whether these China-backed market returns respond differently to foreign shocks during the pre-1997 and post-1997 crash period. Evidence suggests that the contagion effects are stronger in markets with fewer entry barriers. An important implication of our findings is that countries vulnerable to contagion could be justified to impose some limits on capital flows. Copyright 2007 Institute of World Economics and Politics, Chinese Academy of Social Sciences.