Dynamic Linkages between Chinese Financial Market and Global Emerging Markets: An Empirical Assessment of China’s Growing Influence and its Role in the International Financial Architecture
Creators: name: Zeng, Hongjun
Publisher: name: RMIT University
Year: 2025
Subjects: classificationCode: 350203
subject: Financial econometrics

description: In the context of increasing global financial market integration, the dynamic linkages between China's financial markets and emerging global markets have garnered significant attention. With the rapid advancement of information technology and continuous financial innovation, the transmission of returns and volatility between markets now occurs at unprecedented speed and scale, creating a complex web of interconnections. These linkages not only reflect the profound impact of globalisation but also suggest that financial market operations will become increasingly integrated in the future. It is anticipated that this trend will deepen over time, with the relationships between markets becoming more diverse and complex, presenting new opportunities and challenges for investors, regulators, and scholars alike.

In this evolving global financial landscape, China, as the world's second-largest economy and stock market, plays a pivotal role. The market capitalisation of China's stock market is second only to that of the United States, making it a key venue for global capital formation. In recent years, the attractiveness of China's markets to global investors has grown, driven by the increasing openness of its financial markets and the internationalisation of the CNY. Simultaneously, China's economic restructuring and industrial upgrading have provided abundant investment opportunities for both domestic and international investors. Given China's critical position in the global economy and its growing financial influence, understanding the linkages between China's markets and global markets is not only of academic importance but also has significant implications for global financial stability and economic policy coordination.

This study aims to fill a gap in the existing literature by using advanced econometric techniques to comprehensively examine the dynamic linkages between China's financial markets and emerging global markets. We employ a series of financial econometric models and extended frameworks to analyse the time-series behaviour of volatility in China's stock market, providing a more thorough and flexible description of the characteristics of financial market series. The scope of this paper extends beyond emerging stock markets to include futures markets, cryptocurrency markets, and green finance markets. This multi-market research framework enables a comprehensive understanding of the dynamic relationships between China and key global emerging markets, reflecting the interplay between various financial instruments and markets.

One of the key perspectives of this study is the focus on the temporal evolution of inter-market dependencies. Financial markets are dynamic systems, with structures and behavioural patterns that may change significantly due to shifts in fundamentals, structural breaks, or exogenous shocks. This implies that past research findings may lose explanatory power over time. Recognising this, the paper places particular emphasis on capturing the dynamic nature of market relationships. Techniques such as rolling window analysis are employed to dynamically track the evolution of inter-market linkages. This approach not only enhances market transparency but also helps identify key events and turning points influencing these relationships.

The motivation for selecting this research topic stems from its unique perspective and broad potential applications. By examining volatility between markets as a proxy for risk spillovers and dynamic linkages, we gain deep insights into the operational mechanisms of financial markets, revealing the complex interdependencies between different markets. This research not only allows us to dissect the internal dynamics of financial markets from a micro perspective but also provides a scientific basis for identifying market opportunities and managing investment risk. For investors, understanding these dynamic linkages helps optimise asset allocation and improve risk-adjusted returns. For policymakers, the findings can assist in better evaluating policy transmission mechanisms, predicting policy outcomes, and formulating more targeted regulatory measures.

In terms of methodology, this study adopts a multidimensional and multi-layered analytical framework to comprehensively grasp the complex dynamic relationships between China's financial markets and global emerging markets. First, advanced time-series analysis techniques, such as multivariate GARCH models and copula methods, are employed to capture non-linear dependencies and extreme risk transmission between markets. Second, network analysis methods are introduced to study the transmission of systemic risks between markets. By constructing a financial market network, we can identify key nodes, risk propagation pathways, and the evolution of the network structure over time. Moreover, this paper pays particular attention to the impact of major events and policy changes on market co-movements, such as Sino-US trade tensions, the COVID-19 pandemic, and China's financial liberalisation policies.

In terms of theoretical contributions, this paper bridges several important research fields. It combines the microstructure theory of financial markets with macroeconomic theory in international finance, exploring how micro-level market interactions influence macro-level international capital flows and exchange rate dynamics. Furthermore, it connects research on emerging market finance with studies of the global financial system, examining the role of emerging markets, particularly China, in reshaping the global financial landscape. Lastly, it links financial liberalisation theory with research on financial stability, investigating how to maintain financial stability while advancing financial liberalisation.

Regarding policy implications, the findings of this paper will provide valuable insights for decision-making at multiple levels. For Chinese policymakers, this paper can help in better assessing the effects and risks of financial liberalisation policies, optimising the pace and path of liberalisation. For other emerging market countries, the study offers valuable lessons, helping them formulate more targeted strategies in their interactions with China and global markets. For international financial organisations and global policy coordination bodies, this paper provides empirical evidence that can support the improvement of global financial governance frameworks and the strengthening of cross-border financial regulatory cooperation.

For investors, this paper offers important insights for investment decision-making. By gaining a deeper understanding of the interlinkages between China's markets and other emerging markets, investors can more accurately assess the risks and returns of cross-market investments and optimise asset allocation strategies. This is particularly valuable for international investors seeking to access other emerging markets through China's markets, as the paper offers insights into market selection and timing.