We provide an empirical review of the Chinese capital market, focusing on the basic return and risk characteristics of its major asset classes, as well as a comparison to the US market. All major asset classes in China have significant higher volatilities than their counterparts in the US market, but they do not always yield larger returns. Small-company stocks, short-, medium-, and long-term treasury bonds outperform their US counterparts, while large stocks underperform and long-term enterprise bonds yield similar returns.

Accompanying with China’s phenomenal economic growth, its capital market has experienced rapid growth in the past three decades. Several recent reviews have provided useful background and context for understanding these developments, including Allen, Qian, and Gu (2017), Carpenter and Whitelaw (2017), Allen, Qian, and Qian (2019), Amstad, Sun, and Xiong (2020), Hu, Pan, and Wang (2021), and Hu and Wang (2022). In this article, we discuss the key empirical features of the major asset classes in China’s capital market, focusing on their risk and return characteristics and comparison to the US market.
Risk and Return Characteristics

We focus on seven major financial asset classes in China: large company stocks, small company stocks, long-term treasury bonds, medium-term treasury bonds, short-term treasury bonds, long-term enterprise bonds, and a hypothetical asset returning the inflation rate. We construct an annual return series for each asset class. Interested readers can refer to Hu, Pan, and Wang (2021) for details on the construction of this return series. Due to data availability, the actual time span for each asset class is different. The set of data for large and small stocks as well as inflation spans 26 years, from 1993 to 2018; data on treasury bonds have a time span of 22 years, from 1997 to 2018; and data on enterprise bonds spans 19 years, from 2000 to 2018. The statistics reported in Table 1 are based on the available data.

In terms of the long-run performance, small company stocks did the best, yielding an average inflation-adjusted return of 12.46% per year (the geometric mean return) from 1993 to 2018. It’s worth noting that large company stocks yielded an average inflation-adjusted return of only 1.55% per year, lower than medium- and long-term treasury bonds and only marginally better than short-term treasury bonds. Long-term enterprise bonds yielded an average inflation-adjusted return of only 2.64% per year, from 2000 to 2018.

The performance of these asset classes can also be seen in Figure 1, where we plot the wealth indexes (top panel) and inflation-adjusted wealth indexes (bottom panel), i.e., the growth of 1 RMB invested from the beginning of 1993, 1997, and 2000 to the end of 2018. Three graphs are displayed in each panel because the starting point of data is different across the asset classes.