Investing in the Chinese Stock Markets: Historical Perspective and Performance Analysis

Since the creation of its stock markets in 1990, China has registered an exceptional growth with tremendous returns and a high volatility. In three decades, the country has moved from the status of underdeveloped country to one of the world’s largest economies. The thesis aims at providing a thorough understanding of the risk and performance profile of Chinese Equity indices throughout their existence (1990-2015) and in comparison with other countries worldwide. The analysis is adapted to suit the point of view of an American investor, taking the S&P500 as the market benchmark and the US 10 years Treasury bill as the risk-free rate. The study retraces the history of China, presents its economy and ,in more detail, the Chinese stock markets before the accomplishment of a performance analysis. A large sample of risk adjusted ratios like the Sharpe ratio, the Information ratio, the Sortino ratio, etc., will be presented and computed through the statistical software R using monthly prices of indices from Bloomberg. This thesis points out very specific characteristics of the Chinese stock markets: high returns, high volatility, insulated market (low Beta and correlation), speculation (especially due to the presence of many individual investors and the presence of small-cap stocks), government ownership, an alphabet soup of stocks, a lack of Blue chips, etc. However, since 2002, China has made huge progress in opening up its markets to the global economy. As a result of the reforms, Chinese stocks became more easily accessible to foreign investors, thus offering a good opportunity to diversify their portfolio. Over the past few years, the new emerging countries took the lead (Mexico and Indonesia in our sample), while Shenzhen and Shanghai stocks fluctuations moved closer to the benchmark. Shenzhen tends to beat Shanghai as a result of the outperformance of small-cap stocks (due to speculation from individual investors).Master [120] en Ingénieur de gestion, Université catholique de Louvain, 201