THE MACROECONOMIC DETERMINANTS OF STOCK MARKET DEVELOPMENT: EXPERIENCE FROM TWO ASIAN COUNTRIES by SIN YU HO submitted in accordance with the requirements for the degree of Doctor of Philosophy in the subject of Economics at the UNIVERSITY OF SOUTH AFRICA SUPERVISOR: PROFESSOR NICHOLAS M ODHIAMBO July 2018 DECLARATION I, Sin Yu Ho (student number: 53319125), hereby declare that this thesis, entitled “The Macroeconomic Determinants of Stock Market Development: Experience from Two Asian Countries”, is my own work and that all the sources I have used or quoted have been indicated and acknowledged by means of complete references. I further declare that I have not previously submitted this work, or part thereof, for examination at Unisa for another qualification or at any other higher education institution. Signature:……………………………….. Date:…………………………. i TABLE OF CONTENTS DECLARATION ................................................................................................................. 1 TABLE OF CONTENTS .................................................................................................... 2 LIST OF TABLES .............................................................................................................. 7 LIST OF FIGURES ............................................................................................................ 8 SUMMARY ...................................................................................................................... 10 DEDICATION .................................................................................................................. 11 ACKNOWLEDGEMENTS ................................................................................................ 12 ABBREVIATIONS ........................................................................................................... 13 CHAPTER ONE ................................................................................................................ 1 INTRODUCTION ............................................................................................................... 1 1.1 Background to the Study ............................................................................................. 1 1.2 Statement of the Problem ............................................................................................ 3 1.3 Objectives and Hypotheses of the Study ..................................................................... 4 1.3.1 Objectives of the Study ......................................................................................... 4 1.3.2 Hypotheses of the Study ....................................................................................... 4 1.4 Significance of the Study ............................................................................................. 5 1.5 Organisation of the Study ............................................................................................ 6 CHAPTER TWO ................................................................................................................ 7 STOCK MARKET DEVELOPMENT IN HONG KONG ....................................................... 7 2.1 Introduction .................................................................................................................. 7 2.2 The Origin of Stock Market Development in Hong Kong .............................................. 7 2.3 Stock Market Development in Hong Kong ................................................................... 9 2.3.1 Structural Development of the Stock Exchange .................................................... 9 2.3.2 Development of the Second Board (Growth Enterprise Market) .......................... 14 2.3.3 Regulatory Development of the Stock Market ..................................................... 20 2.3.3.1 Overview of the Financial Regulatory System .................................................. 20 2.3.3.2 Regulatory Reforms and Development in the Stock Market.............................. 21 ii 2.3.4 Economic Relations with Mainland China ............................................................ 28 2.3.4.1 Share Reform ................................................................................................... 30 2.3.4.2 The Qualified Foreign Institutional Investor (QFII) and the Qualified Domestic Institutional Investor (QDII) Schemes ........................................................................... 31 2.3.4.3 Closer Economic Partnership Arrangement ...................................................... 33 2.4 The Growth of the Stock Market in Hong Kong .......................................................... 35 2.4.1 The Growth of the Hong Kong Stock Market in terms of Key Market Indicators ... 35 2.4.2 The Growth of the Hong Kong Stock Market in Terms of its Size and Liquidity ... 42 2.4.2.1 The Size of the Stock Market in Hong Kong ..................................................... 43 2.4.2.2 The Liquidity of the Stock Market in Hong Kong ............................................... 48 2.5 Challenges Facing Stock Market Development in Hong Kong ................................... 49 2.5.1 Potential Competition from the Shanghai Stock Exchange .................................. 50 2.5.2 The Shift of Hong Kong’s Role Regarding Further Liberalisation of Mainland China’s Capital Account ............................................................................................................ 52 2.5.3 Regulatory Weaknesses in the Financial System ................................................ 52 2.6 Conclusion ................................................................................................................. 54 CHAPTER THREE .......................................................................................................... 55 STOCK MARKET DEVELOPMENT IN THE PHILIPPINES ............................................. 55 3.1 Introduction ................................................................................................................ 55 3.2 The Origin of Stock Market Development in the Philippines ....................................... 55 3.3 Stock Market Development in the Philippines ............................................................ 59 3.3.1 Structural Development of the Stock Exchange .................................................. 59 3.3.1.1 Unification of Two Stock Exchanges ................................................................ 59 3.3.1.2 Demutualisation of the Stock Exchange ........................................................... 60 3.3.1.3 Development of Stock Market Indices .............................................................. 64 3.3.1.4 Development of Stock Trading Systems ........................................................... 66 3.3.2 Regulatory Development of the Stock Market ..................................................... 69 3.4 The Growth of the Stock Market in the Philippines ..................................................... 78 3.4.1 The Growth of the Philippines Stock Market in terms of Key Market Indicators ... 78 3.4.2 The Growth of the Philippines Stock Market in Terms of its Size and Liquidity .... 83 iii 3.4.2.1 The Size of the Stock Market in the Philippines ................................................ 83 3.4.2.2 The Liquidity of the Stock Market in the Philippines .......................................... 88 3.5. Challenges Facing Stock Market Development in the Philippines ............................. 91 3.5.1 The Shallow and Less Diversified Investor Base ................................................. 91 3.5.2 High Transaction Costs Associated with Trading on the PSE .............................. 93 3.5.3 Lack of Competiveness of the PSE ..................................................................... 94 3.5.4 Weak Corporate Governance of the PSE ............................................................ 95 3.5.5 Weak Legal Framework for Financial Sector Development ................................. 97 3.6 Comparison between Stock Market Development in Hong Kong and the Philippines 98 3.6.1 Origin of Stock Market Development................................................................... 98 3.6.2 Stock Market Development ................................................................................. 99 3.6.2.1 Structural Development of the Stock Exchange................................................ 99 3.6.2.2 Regulatory Development of the Stock Exchange ............................................ 100 3.6.3 Stock Market Growth in Hong Kong and the Philippines .................................... 102 3.6.4 Challenges Facing the Stock Markets in Hong Kong and the Philippines ........... 106 3.7 Conclusion ............................................................................................................... 107 CHAPTER FOUR .......................................................................................................... 109 THE DETERMINANTS OF STOCK MARKET DEVELOPMENT: THEORETICAL AND EMPIRICAL LITERATURE REVIEWS ........................................................................... 109 4.1 Introduction .............................................................................................................. 109 4.2 The Determinants of Stock Market Development: Theoretical Framework ............... 109 4.2.1 The Efficient Market Hypothesis ........................................................................ 110 4.2.2 The