Exploring the Impact of China's Internal Circulation Strategy on Its Stock Market under Deglobalization

Yujie Shi (), Xinyi Hong () and Liming Wang
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Yujie Shi: School of Finance Guangdong University of Foreign Studies Guangzhou, China
Xinyi Hong: (corresponding author) School of Innovation and Entrepreneurship and School of Management Guangzhou University Guangzhou, China
Liming Wang: School of Economics and Management Beijing University of Technology Beijing, China and Irish Institute for Chinese Studies University College Dublin Dublin, Ireland

Asian Economic Papers, 2024, vol. 23, issue 1, 87-113

Abstract: In May 2020, China formulated the Internal Circulation Strategy (ICS) to address the risks of global economic downturns caused by deglobalization. This study is the first to empirically examine the impacts of China's ICS on its stock market performance, focusing on investor behavior. Using data from the Baidu search index and the Shanghai and Shenzhen stock exchanges for the period 27 July 2020 to 5 May 2023, the results reveal that stock returns are negatively associated with investor attention to China's ICS, while stock volatilities are positively associated. This suggests that the ongoing and profound shift in economic strategy might have raised concerns among investors. Furthermore, our analysis of heterogeneity finds that the negative association with stock market returns is statistically significant only during times of high policy uncertainty or geopolitical risk. The positive association with stock market volatility is statistically significant only during times of high geopolitical risk. This indicates that the stability of the internal and external environment plays a crucial role in alleviating investor concerns. We also observe mixed impacts on different sectors of the stock markets, with some sectors unaffected while others primarily experiencing a decline in returns.

Date: 2024
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