Amongst major economies, China has been taking a lead in the development of central bank digital currency (CBDC), which has generated widespread interest and impact around the globe. China’s CBDC, commonly known as e-CNY, is designed with several distinctive features, enabling it to compare favorably to other payment methods such as credit cards, mobile payment, unbacked cryptocurrency, and stablecoins. A variety of social, economic, political, and regulatory reasons can be identified to help explain China’s active pursuit of CBDC. However, the prospect of success will be affected by many factors and may vary between the domestic and international markets. This paper argues that the adoption of eCNY will likely succeed domestically, but may face more challenges in the international markets. The development of e-CNY seems to have created a catfish effect on other major economies in the race for CBDC. It is not fully clear, however, that the CBDC race will be better explained by the first-mover or the late-mover advantage theory. The CBDC project will have both public and private law implications, and several legal issues warrant particular attention in relation to the legal status of CBCD, the role and responsibility of the central bank, legal remedies for losses suffered by CBDC users from cybersecurity issues and operational problems, and the issue of data privacy and protection.

Based on a unique arrangement of trading and disclosure times around earnings announcements in the Chinese stock market, we provide evidence of a striking overnight-intraday disparity in terms of the reaction to earnings news. Specifically, we find that the overnight period exhibits a strong and consistent reaction to earnings announcements, whereas the intraday period trades against both the earnings news and the prior market reaction during the overnight period. In addition, we show that abnormal overnight returns on earnings announcement days exhibit strong predictability for future stock returns, consistent with the overnight returns containing valuerelevant signals. In contrast, we observe no return predictability for abnormal intraday returns on earnings announcement days, which as a result, also undermines the return predictability of abnormal daily returns. We propose possible explanations for the overnight-intraday disparity. We conclude that the differences in trading mechanisms between the two periods as well as in investor composition likely drive the phenomenon.

We investigate the cross-sectional factors of Chinese corporate bond returns via the reducedrank regression analysis (RRA) proposed by He et al. (2022). We collect 37 individual bond characteristics in the extant literature using a new dataset and construct 40 factor portfolios. Empirically, we find that the four-factor models created by RRA outperform the traditional factor models, PCA, and PLS factor models, both in-sample and out-of-sample. Among the 40 factors, the bond market factor is the most substantial predictor of future bond returns. In contrast, other factors provide limited incremental information for the cross-sectional pricing. Therefore, it is necessary to find more new bond factors. We further find that stock market anomalies do not improve the explanatory power of the RRA factor models. In particular, stock market anomalies can only partially explain the systematic part of bond returns in the RRA framework and have almost no explanatory power for the idiosyncratic component.

This study examines whether firms’ financial fraudulent behavior varies when local firms are led by nonlocal CEOs. Building on the social identity theory, we argue that nonlocal CEOs, due to their different location-based social identities, are perceived as outgroup leaders and face intergroup bias from stakeholders within local firms. Therefore, nonlocal CEOs are more likely to conform to laws and regulations and reduce corporate financial fraud to enhance their legitimacy in leading local firms. Using panel data on Chinese listed firms from 2007 to 2020, we find a significantly negative correlation between nonlocal CEOs and the likelihood of corporate financial fraud. Furthermore, our moderating analysis indicate that the negative effect of nonlocal CEOs on corporate financial fraud is stronger (a) for CEOs who have neverwon awards, (b) in firms with poor financial performance and (c) in regions with tight cultures. Additional mechanism tests indicate that nonlocal CEOs’ outgroup identity is more prominent in regions with low regional dialect diversity and local private-owned enterprises. Overall, these findings suggest that choosing a nonlocal CEO warrants attention from the firm’s top management teams and stakeholders.

Fund managers’ ability to evaluate risk has important implications for their portfolio management and performance. We use a state-of-the-art deep learning model to measure fund managers’ forward-looking risk assessments from their narrative discussions. We validate that managers’ negative (positive) risk assessments lead to subsequent decreases (increases) in their portfolio risk-taking. However, only managers who identify negative risk generate superior risk-adjusted returns and higher Sharpe ratios, and have better intraquarter trading skills, suggesting that cautious, skilled managers are less subject to overconfidence biases. interestingly, only sophisticated investors respond to the narrative-based risk assessment measure, consistent with limited attention by retail investors.

Shadow banking in China constitutes a dual-track interest rate reform that adds a new market track beside the controlled formal banking track. Shadow banking leads to Kaldor-Hicks improvement if the gains from financing the underfunded private enterprise (PE) and reducing bank capital idleness caused by ultrahigh reserve requirements outweigh the losses from shadow banking risk. Pareto improvement is feasible as the state-owned enterprise (SOE), a potential reform loser, participates in shadow banking to transfer credit to the more productive PE. Full interest rate liberalization, which removes formal banking controls after the dual-track reform, does not warrant additional profit gain if bank credit misallocation favoring the SOE and SOE's low productivity persist.

We examine a unique one day lockup constraint in stock markets in China and contribute to the understanding of impact of non-marketability on asset prices. Buyers of Chinese stocks are subject to a one day lockup and cannot sell their shares until the next day, but warrant traders are free of such restrictions. We demonstrate that the lockup creates a price discount relative to stock value implied by warrants. We show that the discount decreases throughout the trading day and that investors tend to purchase stocks when the lockup becomes less binding. The paper provides implications to value illiquid assets.

This study examines relation between financial development and the cost of equity capital and finds the following main results: (1) stock market development in general reduces cost of equity, consistent with its role in liquidity provision, information asymmetry reduction, and risk diversification helping to reduce systemic risk; (2) banking development only weakly decreases the cost of equity, consistent with the pervasive state-ownership in large banks constraining their efficiency. Further analysis reveals that the relation between stock market development and cost of equity is more pronounced in large firms and in firms with lower growth potentials, suggesting that stock market development fails to support small and/or growth firms. Moreover, the relation is more pronounced in region with low accounting quality, weak law enforcement, or lower market integration, and in period prior to split share structure reform. The evidence suggests that stock market developments and other institutional arrangements substitute each other in reducing cost of equity. This study contributes to literatures on financial development and cost of equity, and also holds immediate policy implications.

This paper first studies the Chinese warrant market that has been developing since August 2005. Empirical evidence shows that the market prices of warrants are much higher systematically than the Black-Scholes prices with historical volatility. The prices of a warrant and its underlying asset do not support the monotonicity, perfect correlation and option redundancy properties. The cumulated delta-hedged gains for almost all expired warrants are negative. The negative gains are mainly driven by the volatility risk, and the trading values of the warrants for puts and the market risk for calls. The investors are trading some other risks in addition to the underlying risk.

This paper investigates the dynamic and long-run relationships between monetary policy and asset prices in China using monthly data from June 2005 to September 2010. Johansen’s cointegration approach based on vector autoregression (VAR) and Granger causality test are used to identify the long-run relationships and directions of causality between asset prices and monetary variables. Empirical results show that monetary policies have little immediate effect on asset prices, suggesting that Chinese investors may be ‘irrational’ and ‘speculative’. Instead of running away from the market, investors rush to buy houses or shares whenever tightening monetary actions are taken. Such seemingly irrational and speculative behavior can be explained by various social and economic factors, including lack of investment channels, market imperfections, cultural traditions, urbanization and demographic changes. The results have two important policy implications. First, China’s central bank has not used and should not use interest rate alone to maintain macro-economic stability. Second, both monetary and non-monetary policies should be deployed when asset bubbles loom large to avoid devastating consequences when they burst.