Relative development in stock markets: empirical evidence from mainland China and Hong Kong

Factors that might explain the relative growth of the stock markets of Hong Kong and Mainland China in recent years and the different responses of these markets to the 1997 Asian financial and economic crisis are empirically analysed. These factors are used to project the growth of total market capitalization of the two markets in the future. Clearly, Hong Kong, with its open economy and financial markets, was strongly affected by the Asian crisis, whereas Mainland China, with many restric-tions on capital flows still in place, was less affected. The results indicate that the Mainland Chinese stock market is still developing, and forecast models suggest that Mainland China’s market will overtake Hong Kong’s market in size, but may become the more volatile of the two markets, especially as China relaxes its restric-tions on international capital flows. I. BACKGROUND China, with approximately one quarter of the world’s population, is poised to become a major economic force through increased integration with global capital market