Valuation Effects of US–China Trade Conflict: The Role of Institutional Investors

• Published date: 01 November 2023
• Author: Jiahui Chen,Guangyu Nie
• Date: 01 November 2023
• DOI: http://doi.org/10.1111/cwe.12509

©2023 Institute of World Economics and Politics, Chinese Academy of Social Sciences

China & World Economy / 56–78, Vol. 31, No. 6, 2023

56

Valuation Eff ects of US–China Trade Confl ict:

The Role of Institutional Investors

Jiahui Chen, Guangyu Nie*

Abstract

Employing an event study approach to the US–China trade conflict, we found that this

conflict had an overall negative effect on the stock market performance of Chinese listed

firms, but firms with institutional investor holdings (IIH) exhibited smaller losses than

their counterparts in response to a US presidential memo announcing a trade conflict.

We also examined the heterogeneous effects of this conflict on firms. The positive effect

of IIH was larger for firms with foreign exposure and firms located in provinces with a

higher degree of marketization. Institutional investor holdings helped to reduce firms’

cost of refinancing and improved their long-run performance given the same short-

term loss in response to the US presidential announcement during the trade conflict.

These findings explain the role of institutional investors in alleviating the effects of the

US–China trade conflict and achieving financial stability from a micro-perspective.

The results have policy implications for corporate governance and financial market

stabilization in response to trade policy uncertainty.

Keywords: China, foreign exposure, institutional investors, trade conflict

JEL codes: F13, G14, G34

I. Introduction

International trade improved the efficiency of resource allocation and the integration

of industries globally in past decades, boosting economic growth and improving

social welfare (Li et al., 2020b). The deepening of international cooperation lowered

trade policy uncertainty (TPU) and created a stable business environment for firms in

different countries. Trade policy uncertainty can be caused by different policy shocks

such as monetary and fiscal innovations, tax and regulatory reforms, and protectionism.

*Jiahui Chen, PhD Candidate, College of Business, Shanghai University of Finance and Economics, China.

Email: jhchen444@163.com; Guangyu Nie (corresponding author), Professor, College of Business, Shanghai

University of Finance and Economics, China. Email: nie.guangyu@mail.shufe.edu.cn. This research was

supported financially by the National Natural Science Foundation of China (Nos. 71803124 and 72273080),

National Social Science Fund of China (No. 21&ZD082), and the Shuguang Program of Shanghai Education

Development Foundation and Shanghai Municipal Education Commission.

©2023 Institute of World Economics and Politics, Chinese Academy of Social Sciences

The Role of Institutional Investors in Trade Confl ict57

The harsher trade and business environment that TPU brings can harm the production

and investment activities of firms, and can further obstruct the optimal allocation of

resources around the world.

Trade protectionism started to flourish during the first presidential campaign

of Donald Trump, who proposed reducing the US trade deficit, protecting domestic

manufacturing, and increasing domestic job opportunities, which made the trade policies

of the US more uncertain and protectionist. Since he became the 45th President of the

US, various trade conflicts between the US and other countries broke out (Davis, 2019).

The US government not only left the Trans-Pacific Partnership (TPP) but also increased

tariffs on other countries rapidly,1 especially on its largest source of trade deficit, China,

which faced a dramatic tariff increase in 2018. A symbolic date in the US–China

trade conflict is March 23, 2018, in Beijing time (March 22 in Eastern standard time),

when the Trump administration issued a presidential memorandum to impose tariffs

on up to US$50 billion worth of imports from China and thus escalated the conflict.

An abrupt trade dispute between the US and China broke out, which involved them

imposing broad rounds of tariffs upon each other,2 with a huge impact on both countries.

The increasing TPU between the US and China not only affected the conditions

for firms’ business activities at home and abroad but also increased volatility in the

stock markets of both countries, as shown by many recent studies (e.g., Huang et al.,

2018). To measure the influence of the US–China trade conflict on China’s financial

market through the performance of listed companies, we employ an event-study method

following Alfaro et al. (2017).

When uncertainty in the stock market is high, the presence of institutional

investors plays a key role. On one hand, institutional investors are less likely to be

affected by market sentiment and a larger fraction of their investment is prudent (Del

Guercio, 1996). They can also improve the efficiency of stock markets by their greater

information-gathering ability and by alleviating firms’ agency problems, which reduces

the uncertainty in the stock market (Boehmer and Kelley, 2009). On the other hand,

there is an opposite view that institutional investors may intensify market volatility due

to their large trading volumes, the joint use of algorithmic trading, the competitiveness

and short-term focus of the mutual fund industry, as well as the potential conflict of

1The Trans-Pacific Partnership Agreement was a proposed trade agreement between Australia, Brunei, Canada,

Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the US, and Vietnam, signed on February 4,

2016. After US president Donald Trump withdrew the US signature from the TPP in January 2017, the

agreement could not be ratified as required and did not enter into effect.

2In 2018, the US initiated two rounds of tariffs covering US$250 billion on Chinese goods exporting to the

US, and China also imposed retaliatory tariffs on US goods totaling US$110 billion.