Economic policy uncertainty and shifting systematic risk in the Chinese equity market

Purpose This study aims to examine the performance of the Chinese equity market and its technology sub-sector from April 2011 to November 2023, with a particular focus on the declining relationship between Chinese equities and global benchmark returns and the extent to which economic policy uncertainty (EPU) influences systematic risk. Design/methodology/approach Employing a multifactor framework, we estimate time-varying betas for four Chinese equity ETFs – FXI, GXC, CQQQ, and MCHI – relative to the Vanguard Total World Stock ETF (VT). Threshold regression models capture the lagged effects of monthly changes in the EPU index (up to 12 months), while breakpoint regression and recursive coefficient estimation identify structural shifts in market risk exposure. Findings The empirical results reveal a decline in beta estimates over the sample period, accelerating after the COVID-19 outbreak. The findings confirm that shifts in EPU significantly affect ETF betas with lags ranging from three to twelve months, with the technology-focused ETF (CQQQ) exhibiting the highest sensitivity. Breakpoint regressions identify structural breaks around January 2020, consistent with a post-pandemic decoupling of Chinese equities from global risk factors. Risk-adjusted performance metrics, including Sharpe, Omega, Martin and Calmar ratios, demonstrate persistent underperformance relative to the global benchmark. Practical implications The results have important implications for portfolio diversification strategies, capital allocation decisions and risk management frameworks, particularly for investors seeking exposure to Chinese equities during periods of elevated uncertainty. Social implications Understanding the delayed transmission of domestic policy uncertainty into systematic risk helps policymakers and market participants anticipate potential vulnerabilities and reinforce financial stability during future episodes of economic turbulence. Originality/value This study provides a benchmark-driven analysis of Chinese equities, demonstrating how economic policy uncertainty shapes systematic risk over time and revealing structural shifts in market integration often overlooked in existing research.