Policy Research Working Paper10513The Internationalization of China’s Equity MarketsJuan J. CortinaMaria Soledad Martinez PeriaSergio L. Schmukler Jasmine XiaoDevelopment Economics Development Research GroupJune 2023 Public Disclosure AuthorizedPublic Disclosure AuthorizedPublic Disclosure AuthorizedPublic Disclosure Authorized Produced by the Research Support TeamAbstractThe Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent.Policy Research Working Paper 10513The internationalization of China’s equity markets started in the early 2000s but accelerated after 2012, when Chinese firms’ shares listed in Shanghai and Shenzhen gradually became available to international investors. This paper doc-uments the effects of the post-2012 internationalization events by comparing the evolution of equity financing and investment activities for (i) domestic listed firms relative to firms that already had access to international investors and (ii) domestic listed firms that were directly connected to international markets relative to those that were not. The paper shows significant increases in financial and invest-ment activities for domestic listed firms and connected firms, with sizable aggregate effects. The evidence also sug-gests that the rise in firms’ equity issuances was primarily and initially financed by domestic investors. Foreign own-ership of Chinese firms increased once the locally issued shares became part of the Morgan Stanley Capital Interna-tional (MSCI) Emerging Markets Index in 2018.This paper is a product of the Development Research Group, Development Economics. It is part of a larger effort by the World Bank to provide open access to its research and make a contribution to development policy discussions around the world. Policy Research Working Papers are also posted on the Web at http://www.worldbank.org/prwp. The authors may be contacted at jcortinalorente@worldbank.org; mmartinezperia@imf.org; sschmukler@worldbank.org. The Internationalization of China’s Equity Markets Juan J. Cortina Maria Soledad Martinez Peria Sergio L. Schmukler Jasmine Xiao* JEL Classification Codes: F33; G00; G01; G15; G21; G23; G31 Keywords: equity financing; equity issuance activity; equity market liberalization; firm investment; foreign investors; international investors; Stock Connect* This paper was written for the International Monetary Fund (IMF) 23rd Jacques Polak Annual Research Conferencein honor of Maurice Obstfeld, whose work inspired this research. It is forthcoming in the IMF Economic Review.We are grateful to Ariadne Checo de los Santos, Gianluca Yong Gonzalez, and especially Yang Liu and Patricio Yunisfor excellent research assistance. We received very helpful comments from Yingyuan Chen, Ergys Islamaj, PhakawaJaesakul, Joong Kang, Michael Klein, Michael Law, Andrei Levchenko (editor), Gian Maria Milesi-Ferretti, TomasWilliams, two anonymous referees, and other conference participants. For research support, we are grateful to theWorld Bank Knowledge for Change Program and the Research Support Budget. The findings, interpretations, andconclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views ofthe IMF or the World Bank and its affiliated organizations, those of the Executive Directors of the IMF or the WorldBank, or the governments they represent. Cortina and Schmukler are with the World Bank; Martinez Peria is with theInternational Monetary Fund; Xiao is with the University of Notre Dame. Email addresses:jcortinalorente@worldbank.org; mmartinezperia@imf.org; sschmukler@worldbank.org; jasmine.xiao@nd.edu. 1 1. Introduction China’s integration into global financial markets is important both for China and the world economy (Cerutti and Obstfeld, 2019). Before China joined the World Trade Organization (WTO) in 2001, international investors’ access to Chinese stocks was severely restricted .1 After China became a WTO member, it established a Qualified Foreign Institutional Investor (QFII) program that partially allowed selected institutional investors to purchase shares issued in the Shanghai and Shenzhen stock markets. In the post-2012 period, the internationalization process accelerated significantly as Chinese author