How Trade Rules Shake Up Chinese Businesses

Trade rules are confusing and frequently changing, making it difficult for companies to plan ahead. In China, this uncertainty is causing significant fluctuations in stock prices, leading to what is known as crash risk.

Key Findings from Research

Researchers studied Chinese companies from 2001 to 2023 and discovered that:

• Unclear trade rules increase the likelihood of stock price crashes, particularly for:
• Private companies
• Companies where the CEO is also the chairperson
• Firms doing business abroad
• Companies not audited by top firms

• Unclear trade rules lead to:
• Companies hiding bad news (discretionary accruals)
• Reduced exports
• Investor confusion
• Incorrect analyst predictions
• Sudden drops in stock prices

Positive Influences

The study also found that:

• More open markets and greater use of technology reduce the risk of stock crashes.
• These factors help companies manage uncertainty more effectively.

Conclusion

The research highlights how unclear trade rules can make companies more fragile and impact stock prices. This information is valuable for policymakers and investors in making informed decisions.