On The Mechanism Of Stock Market Transmitting Monetary Policy In China

Since the 1990s, the development of the capital market has put forward the great challenge to the monetary policy. The development of capital market changes the monetary policy transmission mechanism which is distorted and complicated. Study on the relation between capital market and monetary policy becomes an important subject.The capital market of China includes the stock market and bond market mainly. But because the bond market in China develops and relatively lags behind, the function of transmitting monetary policy is relatively weak. Therefore, this paper focuses on stock market. The stock market develops with the economic system reform. Its initial purpose that serves the reform of owned enterprise and the limitation of system design has restricted the function of stock market which influences greatly its efficiency of transmitting the monetary policy.The mechanism of stock market transmitting monetary policy is such a process: central bank administers monetary policy operation, and it impacts assets prices which have changed the relative prices of assets( include currency),and the body in stock market( personal investor, institutional investor, financial organization and enterprise) make reactions for the changes of assets prices which affects investment and the consumption in the real economy field further, and last influences the produce in the real economy. In a word, monetary policy tool operations impact the variables in the financial field which influence on the variables in the real economy further. Therefore, the mechanism of stock market transmitting monetary policy can be divided into two close links: from monetary policy to the stock market; from the stock market to the real economy.In the first link, we may select interest rate and currency supply as the variables transmitting monetary policy, and analyze the relation between the changes of interest rate and stock price, the relation between money supply and the money demands in stock market.In theory, the change of interest rate impacts on the change of stock price to negative way. In order to stimulate the economic growth, Central Bank reduces the deposit and loan interest rate eight times from May 1 in 1996 to February 21 in 2002 continuously. The stock market response sensitively .Next exchanging day, the stock price goes up quickly. The result of empirical model indicates that the explanation ability that the change of interest rate leads to the stock price is strong, which proves that the interest rate decrease is the main reason of the stock price rise. It is according to the model in theory.Since 1998 year, the money supply that Central Bank expanded has been increased progressively at the more than ten per cent speed of every year. But the amount of entering the stock market increases while its growth surpasses that of M0, M1 and M2.If kept such growth rate, they would affect money supply more and more. The empirical model proves that the demand of money in stock market has been one of the greatest factors. The degree that the stock market affect M1is nearly the same as that GDP affect M1 while it shows that the money demand in the stock market affect greatly the liquidity of money. If stock price is so high that it cannot match its real value which would leads large quantities of social capital to stock market which can affect the capital input in the real economy; if central bank enlarges money supply to satisfy the demand of stock market which can causes social credit excessive expansion and cannot keep the economy healthy development. So, the central bank falls into difficult choice. And it needs to keep the money supply in such a proper degree.In the second link, we may select stock prices as the variables in the stock market and investment and consumption as the variables in the real economy field. In theory, stock prices influence investment and consumption through wealth effect, Tobin's q effect and balance sheet effect. The empirical model proves that the changes of stock prices have not been one of the grea...