Economic integration in the Chinese Economic Area (CEA): Modeling, estimating and testing

This thesis is divided into three chapters. Chapter 1 examines the extent of integration of both goods markets and financial markets between China, Taiwan and Hong Kong. The key issue it addresses is: to what extent are goods and asset prices in China, Taiwan, and Hong Kong linked to each other? The analysis employs two econometric techniques, Two Stage Least Squares estimation and the Johansen test, to attempt to find some evidence in favor of purchasing power parity (PPP), or uncovered interest parity (UIP), between Hong Kong and Taiwan in recent years. We also analyze the basic preconditions for an integrated financial market in China. The tests reject PPP and UIP, suggesting that markets in the Chinese Economic Area are incompletely integrated.;Chapter 2 estimates the probability market participants hold that Hong Kong's economy will continue on its current course in the years leading up to 1997. By using asset price data in a regime shift model to estimate this probability over time, we find how markets reflect agents' beliefs about the possibility that the liberal market economy of Hong Kong will continue after 1991 or be severely curtailed. We find that stock and real property prices are very responsive to political events and announcements in China regarding future policies towards Hong Kong in the direction we might expect.;Chapter 3 employs a Vector Autoregression methodology to analyze the degree to which economic variables in one economy affect endogenous variables in another economy. It empirically measures the extent to which Taiwan and Hong Kong's policy variables, inflation rates and trade volumes affect industrial production in three economic regions of China over the period from 1985 through 1992. The results indicate that the greater regional income per capita is, the larger is the effect of Taiwan's or Hong Kong's economic performance and policies on that regions output. We also find that this impact is greater in the second-half of this period than in the first, and that Hong Kong's impact is greater than that of Taiwan. The chapter also estimates how the impact has dispersed in the three economic regions of China since 1989.