Speculating China Economic Growth Through Hong Kong? Evidence from the Stock Market IPO and Real Estate Markets

Abstract

This paper argues that since China closes her asset markets, investors turn to Hong Kong instead. The initial public offerings (IPO) of Chinese firms in the Hong Kong stock market and the local housing market of Hong Kong improve the prediction of each other, as they may serve as a coordinator of herds among investors. Alternative explanations such as the "production conjecture" and "underlying factor conjecture" are found to be inconsistent with the data. Our results are also consistent with the increasing importance of Chinese tourists in the world. Directions for future research are also discussed.Keywords: Animal Spirits conjecture, production conjecture, underlying factor conjecture, causality, wealth effect JEL classification numbers: G10, R20, R33 Coorespondence: Charles Leung and Edward Tang, Department of Economics and Finance, City University of Hong Kong, Kowloon Tong, Hong Kong, (phone) (852) 3442-9604; (email) kycleung@cityu.edu.hk ; edward.c.h.tang@gmail.com 2 "… But if we look up confidence in the dictionary, we see that it is more than a prediction. The dictionary says that it means "trust" or "full belief." The word comes from the Latin fido, meaning "I trust." The confidence crisis that we are in at the time of this writing is also called a credit crisis. The word credit derives from the Latin credo, meaning "I believe."… In good times, people trust. They make decisions spontaneously. They know instinctively that they will be successful… Asset values will be high and perhaps also increasing…. When people are confident they go out and buy; when they are unconfident they withdraw, and they sell. Economic history is full of such Empirical researches suggest that on average, a high economic growth is associated with a high return in the stock market.1 Thus, it would be natural to suggest that one should invest in the China stock market. On the other hand, it may not be easy for individual investors to "capture" such phenomenal growth financially. (Insert Figure 1) The case of Hong Kong is selected by this paper with good reasons. Despite its small geographical size, Hong Kong is an important financial market in the region. Hong Kong is the second largest Asian financial market Kong has a very good legal system . Leung, Wong and Cheung (2007) shows that in terms of the average number of transactions per unit of housing, Hong Kong play a more important role than institutional investors and developers. And since households would arguably be more vulnerable to "market sentiment" and "social interactions", the "market sentiment channel" may appear more significantly in the housing market than in the commercial real estate market. In fact, Wang et al (2000), Leung et al (2013) have proposed that "over-confidence" on the household side may explain a significant portion of the housing market dynamics in Hong Kong. This paper can be understood as an indirect test of that class of "conjecture". If the "market sentiment" is indeed the driving force, we would observe a positive and significant relati...

Nexus between visitor arrivals and residential property rents in Hong Kong

“…Kwan, Leung, and Dong () develop several consumption‐based asset pricing models to improve the accuracy of predictions on housing returns. Leung and Tang () use Granger causality tests and vector autoregressive modelling techniques to demonstrate that initial public offerings (IPO) of Chinese firms in the Hong Kong stock market influence property prices. Leung and Tang () suggest that short supply in both the public and private housing markets drives up property prices in Hong Kong.…”

Bayesian analysis of Hong Kong's housing price dynamics

“…Meanwhile, the performance of Hong Kong's property market is widely believed to be influenced by market sentiment, given Hong Kong's status as an international financial centre with free capital mobility. Leung and Tang's () analysis of Hong Kong's IPO activities and housing market also point to the role of market sentiment as the driving force in the asset markets. Hence, we identified a positive market sentiment shock in the BVAR system, in which a positive shock pushes HSI and housing prices upward.…”

“…Many studies have analyzed Hong Kong's property market, in light of its salient features and importance to the economy (e.g. Hui, Cheung, & Pang, ; Chang, Chen, & Leung, ; Leung and Tang, ). Nevertheless, most of these studies focus either on the transmission of financial market fluctuations to the housing market, or on the micro features using transaction‐level data.…”

Dependence of Real Estate and Equity Markets in China with the Application of Copula

“…Hoesli and Reka (2015) conducted an empirical investigation of the channels Asian Economic and Financial Review ISSN(e): 2222-6737/ISSN(p): 2305-2147 underlying the risk of contagion between real estate and stocks in the United States. Leung and Tang (2015) studied the stock market and the real estate market in Hong Kong and found that improve the prediction of the China's real estate asset markets.…”