| After 30 years of rapid growth, China has made remarkable achievements. However, behind the success story lie some problems in China’s economy, and structural adjustments have to be made without delay.Internally, China’s manufacturing sector has long been at the lowend of the international industrial chain, struggling to upgrade itself from "made-in-China" to "created-in-China." Several existing conditions place a drag on the Chinese economy, including the high energy consumption of traditional industries, the high pollution that results frommanufacturing, and low value-added industries that make transformation difficult. Noticeably, emerging strategic industries are struggling withtechnological advancement and the duplication of low-level construction results in tremendous waste. The service industry’sshare in the economy is too small to operate efficiently. In fact, the backwardness of the services industry and restrictionson the development of the manufacturing sector have created a vicious circle. The country is also facing challenges from external sources, suffering from the shocks of global market uncertainty, thereby jeopardizing exports, shutting down plants, and leading to mass unemployment. Therefore, China needs to upgrade the quality of its industries, make advances in technology, and promote industrial growth to break the economic bottleneck coming from both internal and external sources. Technological advancement and upgrading the quality require capital. Judging from the experience of other countries, in addition to money and bond financing, the stock market playsa significant role inpromoting industrial growth. Exploring financialization as the background to the stock market’s influence on China’s industrial growth has both theoretical significance and practical implications.Using theories drawn from economic growth and financial development, combining qualitative judgment and quantitative measurements and inductive and deductive methods, this dissertation analyzes the stock market’s behavior and its financial/investment functions inthe growth of industrialproduction and the mechanism of structural optimization. To conduct an empirical analysis of China’s stock market and industry growth, this study, using time series data on A-share listed companies, carries out an empirical analysis to answer the following questions: Does the stock market have any impact on China’s industrial growth? And how does it affect industrial growth? In line with the stock market’s development and the formulation and implementation of policies for industrial growth, this study provides the corresponding counter measures and suggestions. The main concerns and viewpoints are outlined as follows.First is to provide a literature review of the basic economic theories that delineate the fundamentals of the stock market and industrial growth, with an aim to laying a foundation for describing the mechanism wherebythe stock market affects industry growth. Thus, I introduce theories of industrial structure and industry growth and theories related to the stock market, such as the efficientmarkets theory, the capital asset pricing theory, and financial contagion. The main purpose is to sort out the specific role of growth theory and financial development theory when applied to the analysis of the stock market and industrial growth.Second, some issues and questions with respect to the current Chinese stock market and industrial growth are described and analyzed as follows.(1) The stock market. This involves three different aspects:the development process of the stock market, the scale of the market, and the stock market’s financing and liquidity capacity. The items covered are the following:a description of the stock market, the conditions of stock transactions, the number of listed companies and the number of shares, the percentage of stock financing compared to the total amount of financing for the community, the circulation market value, the percentage of total securities, trading volume,and turnover rate. From adevelopment viewpoint, the problems in the Chinese stock market are vague entitlement and a lack of standardization in dividend distribution. From the viewpoint of its current development status, the Chinese stock market’s size and scale are expanding; securities lack liquidity; orders involve irrational stock transactions;the stock market is overly speculative;and the stock market’s role in financing lags far behind the financing needs of the society.(2) Industrial development. From an aggregate growth perspective, total industry growth is rising, but the speed is slowing down. This is consistent with growth of industry’s size and scale. From a structural optimization perspective, the emerging strategic industries and the modern service industries are restricted by their size and technological advancement.In addition, low capacity utilization and the excess capacity of traditional industries are very serious. Currently, the industrial structure is quite complex. In fact, emerging strategic industries consist mainly of small and medium enterprises (SMEs); traditional industries are operated by big state-owned enterprises (SOEs) and jointly owned by small and medium-sized private enterprises; and modern services are monopolized by large state-owned enterprises and SMEs. At this point in time, financing is the main hurdle keeping China’s industrial structure from being optimized. An enterprise’s ability to obtain financing from the stock market is closely related to its position in the industrial structure. From the perspective of enterprises in various industries, apart from the monopoly nature of the modern service industry sectors, it can be argued that emerging strategic industries, traditional industries, and the modern services sector are all facing financial difficulty. Statistics reveal that the stock market and total industrial production are growing over time. However, the growth rates have been moderate in recent years. However, the issue of the relationship between the stock market and industrial structure optimization deserves further discussion.(3) Financial development. The data reveal that the state of industrialization, marketization, and development of internationalization cannot be separated from financial development. The results from comprehensive studies suggest that a deeper investigation of financial development and its relation to China’s industrialization, marketization, and internationalization of finance would shed some light on the development of China’s stock markets and industrial growth. This effort will run through the discussion of this dissertation.Once again, the focal point is the process and mechanism with respect to how thestock market affects industrial growth. Giving special attention to the stock market’s functions and stressing themarket’s impact on aggregate growth and structural optimization, I provide the theoretical framework and mechanism that connect the stock market to China’s industrial growth. Specifically, (1) the primary functions of the stock market in relation to industrial growth are through its operations on stock market financing, resource allocation, investment channels, risk sharing, access to information, and inventory optimization in terms of guiding policy, monitoring industry trends, and forecasting the business development environment and business strategy. (2) The impact of the stock market on industrial growth goes way beyond other traditional approachesto financing and its mechanism creates financial externalities and affects investor sentiment and business communications between producers and shareholders. Traditionally, savings constitute the main source of loanable funds for industrial development. Strategically, government budget deficits, monetary expansion, and running a balance-of-payments surplus all play their respective historical roles in funding industrial growth in China. Modern development, as China’s economy engagesin structural adjustment, suggests that the stock market ought to playa more significant role in financing. (3) The stock market plays a significant role in industrial structure optimization. The stock market can provide effective funding and promote technical advancement and three other aspects of business restructuring in China’s industrial structure optimization:fostering emerging strategic industries, speeding up the adjustment of traditional industrial transformation, and developing the service industry, especially modern service goals. As mentioned above, we see that the stock market, mainly through financial support, resource allocation, and risk diversification, plays a significant role inpromoting China’s industrial growth. By focusing on the quality of listed companies and bringing their functions into full scale, a well-operating stock market would significantly promote industrial growth and structural optimization. Having done that, we are able to fulfill the objective of China’s industrial policy guidance, predicting the development of the macroeconomic environment. In addition, corresponding to the description and mechanism of analyzing Chinese industries, this dissertation conducts empirical estimations and analyzes the effects of the stock market on industrial growth and structural optimization indifferent sectors.This dissertation achieves the following objectives. (1) Total industrial output growth. Using monthly data for 1995-2014, seven ARMA-ARCH models are constructed. The evidence shows that an increase in the money supply, a rise in international reserves, a devaluation of the domestic currency, an expansion in government budget deficits, and an improvement in the macroeconomic climate all help to bring about industrial output growth. Foreign economic forces, such as totalU.S. industry growth and U.S. stock market stress, will have spillover effects on China’s total industrial growth. The evidence from this study finds that a rise in the U.S. total industrialgrowth will have a significantly positive effect on China’stotal industrial growth. However, increased financial stress in the U.S. market will have a negative effect on China’s total industrial growth. More important, this research finds concrete evidence to support the hypothesis that an improvement in stock markets helps to promote industrial growth in China’s market. The significance test supports a positive relationship between output growth and stock market advancement. This finding is robust to different measures of stock market performance. (2) Structural optimization. Using monthly data for the sample period 1995-2014, an ARMA-GARCH model is developed to estimate stock returns in relation to the underlying determinants. The main explanatory variables are the growth of dividend yields, a change in illiquidity, a change in the macroeconomic climate, the depreciation of the Chinese yuan U.S. stock returns, and a change inthe U.S. stress index. Estimations are applied to both the aggregate market and 10 sectoral markets. Since our focus is on structural optimization, the main analysis is asectoral analysis. Detailed empirical investigations of industry level are conducted. On the basis of ICB industry breakdown criteria, all listed companies are divided into ten sectors: raw materials, consumer goods, consumer services, financial services, healthcare, manufacturing, energy, technology, telecommunications, and utilities. These ten sectors feature different characteristics consistent with their domestic Chinese classification. For instance, manufacturing, energy, science and technology are emerging strategic industries; the raw materials industry is comparable to traditional industrial characteristics; consumer goods, consumer services, financial services, healthcare, telecommunications, and utilities are classified as service industries.The explanatory variables in the empirical study useboth domestic and international elements. First, evidence from domestic variables suggestsno significant finding to support the notion that stock returns can be predicted by the growth of dividend yields. However, the evidence confirms that an improvement in the domestic macroeconomic climate is highly significant in explaining stock returns. The empirical results conclude that stock returns are negatively correlated with the change in illiquidity, implying that it is negatively related to the current level of illiquidity and positively related to lagged illiquidity. This suggests that illiquid stocks are required to have higher expected returns. Second, evidence from international variables suggests that stock returns, in general, are positively correlated with the depreciation of the Chinese yuan, suggesting that depreciation of the yuan provides advantageous effects in promoting China’s employment and exports, giving rise to higher profits and, in turn, a rise in industrial stock prices. A sectoral analysis of stock returns indicates that China’s markets are correlated with stock returns in the corresponding sectors in the U.S. markets, except the technology and telecommunication industries. This provides some evidence on the issue of the co-movement of industrial stock returns. However, there is strong evidence that Chinese stock returns are negatively correlated with financial stress originating from the U.S. market, signifying that the rise of a financial crisis in the U.S. market will soon be transmitted to Chinese stock markets with a damaging effect. Finally, test equations show that most sectoral stock returns present positive autocorrelations, displaying a short-run momentum, and rejecting the efficient market hypothesis.Our robustness test suggests that the explanatory variables in each sector perform consistently. By using trading volume turnover as an alternative proxy for liquidity to test the relationship between sector stock returns and stock liquidity,evidence suggests that all of the estimated coefficients agree with the results derived from the model using Amihud’s (2002) illiquidity measure. Our test results indicate that the coefficient on the turnover volume is positive.This holds true across different sectors, suggesting that a rise in trading volume turnover contributes to a rise in stock prices. However, the impact on price changes varies from sector to sector. This study suggests that the basic materials sector has the highest estimated coefficient, which is in contrast to the telecommunications sector. This means that investors in the basic materials sector require much higher liquidity premiums to hold stocks. A further test of the hypothesis that in response to trading volume turnover,stock returns follow an identical structure finds no supportive evidence. This conclusion drawn is that those 10 sectors present quite different responses to liquidity changes. Owing to this inherent heterogeneous behavior, it is hard to achieve structural optimization by applying a uniform policy. In fact, a policy recommendation based on the aggregate model can be misleading. Similarly, while testing the hypothesis that stock returns for different sectors react to financial stress from the U.S. market follows an identical structure, the null is also rejected. Thus, for risk management purposes, decision maker certainly has to factor in the sectoral variations and cannot assume a universal structure in dealing with stress contagion.In conclusion, although the evidence does not lend much support for a positive relationship between stock returns and dividend yields, using dividend yields is still a popular approach among Western business firms to attract investors, since it is a good channel through which to raise funds from investors, and this channel appears to be a stable source for funding industries. To foster industrial structural optimization, some sort of tax policy may be considered to encourage productive industries and reward investors. Our study shows that liquidity has a significant impact on stock returns. While China is moving toward a higher-end industrial structure, the financing method should not totally rely on the banking system. Stock financing should come into play. However, the stock market is highly volatile and the trading mechanism is not widely recognized by ordinary investors. More transparent disclosure of companies’ performance, better regulatory monitoring, and effective supervision of enterprises will helpto minimize systemic risks and protect investors. Volatility has been considered a risk factor to investors, and it can arise either from the uncertainty of asset valuations in the domestic market or from external instability. Effective and timely risk management and financial policies are called for to preserve capital market stability, thereby helping households to engage in investment activities and industries to obtain funding to achieve thesocial welfare maximization of inter-temporal choice.Three suggestions are given according to the above conclusions. First, put more focus on the design and implementation of the stock market mechanism, ensuring its full play on the industrial development; second, establish the effective international risk prevention system, preventing the harm to industrial development from international finance risk. Third, creating a favorable macroeconomic environment for the stock market, which provide protection to industrial development.
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