A Nascent International Financial Channel of China’s Monetary Policy Transmission

By Chang MA, Alessandro REBUCCI and Sili ZHOU
Forthcoming in Journal of International Economics

Abstract:

Chinese portfolio equity outflows grew significantly over time due to capital account liberalization. Using matched stock-fund holding data under the Qualified Domestic Institutional Investor (QDII) program, we identify a nascent financial channel of international transmission of Chinese monetary policy to world stock markets. Event studies around monetary policy announcement days uncover a cross-sectional differential impact: returns on MSCI indexes and U.S. stocks with QDII exposure are more responsive than those of non-exposed ones. The effects are driven by smaller, less liquid, and lower-turnover stocks, but not by China-concept stocks, or those exposed to mainland macroeconomic shocks. We also provide evidence consistent with a retail-driven portfolio-rebalancing mechanism: tightening periods are associated with outflows from QDII funds with high equity portfolio shares that fund managers do not fully offset. Retail flows also seem more closely associated with monetary policy changes than institutional flows.