A Study On The Asset Price Transmission Effect Of China’s Monetary Policy

It has been demonstrated by monetary policy studies that asset price is one of the critical channels for the transmission of monetary policy. Through Tobin’s Q effect, the wealth effect and the balance sheet effect of asset prices, the impact of monetary policies can affect the investment and consumer behavior of micro-economic main body and may lead to changes in macro-economic aggregate. Following the continuous development of the financial market and rapidly advancing financial innovations, the function performed by bank credits and interest rates in monetary policy transmission is being weakened, while that offered by asset prices is on the rise. The transmission effect of asset prices on monetary policy is making the monetary policy transmission mechanism more sophisticated, which in practice increases the difficulties for monetary authorities in various countries to conduct macro-economic regulation and control by adjusting their monetary policies. Empirically, examples of huge impacts imposed by asset price fluctuations on real economy can be found everywhere, for which monetary policies usually play a major role. Asset prices serve as an intermediary between monetary policy impact and the real economy, in other words, asset prices are one of the transmission channels of monetary policies.In China, with the progress of economic transition, the capital market has also experienced a process of gradual growth that started from scratch. A multi-layer market system has taken shape as a result of the progressively improving infrastructure and system construction, continuous perfection of capital market supervision, and diversified composition of market participants. The development of capital market is enforcing strong influence upon the development of our national economy and social structures. It can be predicted with confidence that, with increasing number of public companies, organizations and individuals joining in the operation of capital market, the stock market will turn out to be a barometer to forecast the trends of our national economy, and the investment effects and wealth effects of stock prices will gradually show up. In the meantime, China’s real estate market is also growing into maturity in the period of deepening transitional shifts in the country’s economic and social structures. China has enforced policies for urban land property right reform and urban housing system reform, on the basis of which a multi-layer real estate market had been established, which, in turn, gives rise to various forms of real estate transactions and platforms for such activities. Undoubtedly, the rapid development of real estate markets and the soaring real estate prices have made the real estate industry one of the several major pillars that support our economic growth, which places the real estate industry into a prevailing position to affect the operation of our national economy.While the position and function of China’s capital market and real estate market are being enhanced, the fluctuation of stock prices and real estate prices will increasingly influence our real economy. Theoretically speaking, this will lead to the diversification of the transmission agents and transmission channels of our monetary policy, creating a potential or practical challenge to the macro-regulation and control of our monetary policies. Therefore, a study on the asset price transmission effect of China’s monetary policy will provide significant theoretical and practical implications for policy making in this field.Integrating theoretical rationale with proof demonstration, this essay elaborates on the asset price transmission effect of China’s monetary policy, and analyzes the related determinants of influence. Methodologically, the essay makes an effort to sort out monetary theories and monetary policy transmission mechanisms which will serve as theoretical basis for our further analysis. From an empirical point of view, the author first reviews the evolution process of China’s monetary policy, capital market and real estate market during the country’s economic transitional period. And then, on the basis of this review, the SVAR model is introduced, which, in combination with quantitative economic methods such as Johansen testing, Granger causality test, impulse response function and variance decomposition, etc., makes an empirical analysis of the asset price transmission effect of China’s monetary policies.More specifically, this essay first makes general comments on the relevant theories. Then it details and analyses the evolution of China’s monetary policy, capital market and real estate market covering its entire economic transition period. Methods such as SVAR model, variance decomposition and impulse response function are employed to study the transmission effect of monetary policy concerning stock prices and real estate prices. The major factors affecting the asset prices transmission effect of China’s monetary policy are enumerated. Here are the main conclusions:First, it is proved by the empirical study that money supply and fluctuating interest rates impose significant impact on China’s total economic output, price level, and the changes in investment and consumption, which implies that monetary policies are playing a more and more important function in the macro-economic regulation and control. Through the economic transformation and financial reform carried out in the past three decades, China’s central banking system has been gradually consummated, and the central bank is exercising effective regulation and control over economic operations through the adjustment of its monetary policies.Second, the impact of stock price fluctuation upon investment and total economic output proves to be insignificant, which implies that the investment effect of stock prices remain to be very limited. Similarly, money supply and interest rate fluctuation do not affect changes in stock prices in any significant way, which indicates that stock prices are largely immune to changes in monetary policies. In consideration of these two aspects, we can conclude that China’s stock prices do not show any significant monetary policy transmission effect, and that the monetary policy transmission channel in China’s capital market is less than unimpeded.Third, the real estate price fluctuation equally affects investment, total output and price level, which implies that the real estate price has an investment stimulating effect, and it also affects inflation rate. This conclusion justifies the empirical judgment that the real estate industry is a highly correlated industry. The fact that the fluctuation of real estate prices does not apparently influence consumption proves the viewpoint that currently in China real estate price does not support wealth effect. On the other hand, money supply and interest rate fluctuation strongly affect real estate prices. It can be concluded based on these two points that China’s real estate price shows a certain degree of monetary policy transmission effect.Fourth, having analyzed China’s capital market development and financial structure evolution, and based on the comparison of them with those of developed countries, the author reveals three major factors affecting the asset price transmission effect of China’s monetary policy:the defective system of the capital market and the real estate market, the relatively limited size of the capital market, and the discrete and unparalleled development between the monetary market and the capital market.This essay may have put forward the following new ideas built upon relevant studies both at home and abroad.First, stock price and real estate price are placed into the same model for empirical analysis. By integrating real estate price variables into the stock price equation, and stock price variables into the real estate price equation, the model can indicate, to a certain degree, the substitution effect between the real estate price and the stock price. Second, the study on the asset price transmission effect of monetary policy is conducted from the perspective of China’s financial structure evolution.However, for subjective and objective reasons, some obvious defects do exist in the essay.First, theoretical reasoning seems a bit insufficient in the summarizing account of China’s monetary policy evolution and the development of its capital market and real estate market.Second, lack of quantitative data support for the influencing factors is another regrettable defect of the essay.