Geopolitical Risk Exposure upon the Chinese Defense Industry Companies: Co-Movement Evidence from Wavelet-based Granger Causality Tests

Firm-specific information from two Chinese stock markets is used to examine if any causal effects exist from the measures of Geopolitical Risk (GPR) on the Chinese Defense Industry (CDI). Using the wavelet-based Granger causality test method, we find a few weak cases of causality effect from both global and local GPR indexes to the top 10 CDI stock block synchronicity, which can serve an indicator of information asymmetry with limited transparency. However, no causal effect was detected from the index with the 30 best-performing stocks from the top 10 CDI groups. Some causal effect exists from the World GPR index to the extended CDI index of 150 stocks of Defense and Information. The novelty of applying the wavelet-based Granger causality tests to examine GPR exposure in the listed CDI stocks is highlighted. Both the top 10 CDI enterprises and the smaller publicly-traded CDI firms in China have reacted less sensitively to the GPR exposures, except a few events marginally detected in the examination samples along the inquiry timeframe. Our findings support the arguments against the new Cold War narratives as typically implied by the “China threat” theory. These reproducible tests imply factual consistency with the dual-function mission of serving both civil and military markets, as claimed and possibly practiced by most CDI enterprises. Their shift from suppliers of military goods or services to market competitors in civilian sectors would help change some conflict-oriented conceptions or state policies.