China's sovereign debt market (1921–37): Information efficiency and the impact of rumours

China's sovereign debt market emerged with the establishment of the Shanghai Chinese Merchant Stock Exchange (SCMSE) in 1921 during the Beijing Era (1912–27) and flourished in the Prewar Nanjing Era (1927–37), when it dominated the securities market. Despite this growth, our analysis of weekly SCMSE–traded debt returns shows that the market lacked even weak form efficiency throughout the period. This inefficiency fostered a rumour‐driven environment. Using Shenbao , we find that weekly rumours related to the debt market rose from 0.6 in the Beijing Era to 1.5 in the Nanjing Era, yet the Beijing market was more vulnerable to their influence. Positive rumours were ignored in both periods, whilst each negative rumour reduced weekly returns by 96 basis points in the Beijing Era, compared with only 53 basis points in the Nanjing Era. Both markets responded similarly to rumours later verified, yet the Nanjing market was far less unsettled by false reports. Taken together, the evidence suggests that by the Nanjing Era the sovereign debt market had developed greater resilience in processing information, marking a step towards improved efficiency.