Analysis Of Correlation Between Real Estate Market And Stock Market In China

In modern economic society, real estate and stock are two of the most important investment assets. Real estate market and stock market were initiated in capitalist countries. The developments of these two markets have great impacts on the operation of the national economy and the whole world. In China, reform and opening up had prospered these two markets. With over ten years of fast development, China's stock market capitalization is the second largest one in the world now, just after US stock market. Real estate has become the pillar industry of China's national economy, and its fluctuation can affect the national economy. As two key markets in the modern economic society, whether there is an interaction between these two markets, which market plays the dominant role, and how to use the correlation between these two markets to promote the development of the national economy. Solving these problems is important to strengthen China's macro-control capability and guide the national economy develop healthily. This paper inquiries these questions by theoretical analysis and empirical test.This paper firstly introduces some relevant concepts and the prominent characters of real estate market and stock market, and shows the differences between the two markets and ordinary commodity markets.Secondly, the paper briefly reviews the historical development path of China's real estate market and stock market, points out that these two markets in China have just developed in a short time, developed fast and are not mature markets, and briefly analyzes the current problems of these two markets.Then, the paper reviews the historical performance of the correlation of the two markets in US, Japan and various Southeast Asian countries. It finds that though there are different economic environments and different capital market characteristics in different countries, all the countries presents correlation between these two markets for a given period of time, especially when the asset bubble burst.After review, the paper does theoretical research on the conduction mechanism of the correlation of these two markets from the aspects of function of credit mechanism, wealth effect, macroeconomic conduction and portfolio theory. Rise of property price and stock price can cause credit expansion by credit mechanism, then activate investing activities, and prosper real estate market and stock market. Real estate market and stock market can affect gross investment and overall consumption through wealth effect, then they can affect investment activities, consumption activities, and achieve the interaction between the two markets. Changes of various macroeconomic factors such as economic cycle, money supply, interest rate, and rate of inflation can affect real estate market and stock market, make the fluctuation conditions of the two markets present the identical tendency, and display correlation. Portfolio theory discusses the substitute relation of real estate asset and stock asset through the aspect of risk reward.Later, the article does an econometrics analysis of the correlation between China's real estate market and stock market with co-integration analysis, Granger Causality Test and Impulse Response Function. Also, this article explains the results with related theories. It finds that in different time of economical booming condition, there are different correlations between these two markets, and the reason is that there are different impacts of effect of credit mechanism, wealth effect, macroeconomic conduction and substitution effect in portfolio theory at different time. Between January 1998 and May 2002, China's economy condition was not good, expansionary fiscal and monetary policies caused credit mechanism and macroeconomic conduction to play the main effect. In this period, there was a positive correlation between these two markets, and stock market played a dominant role in the interaction of the two markets. From June 2002 to August 2007, China's economy was stable, stock market was murky, and the government took moderately contractive monetary and fiscal policy. At this time, substitution effect played a leading role, and real estate market resided in the dominant position. After September 2007, China's economy has experienced a fluctuation time, the correlation between these two markets became complicated. Substitution effect made real estate investment market have a negative impact on stock market, while stock market had positive impact on real estate investment market by the effect of credit mechanism and wealth effect. Real estate market and stock market are Granger cause mutually.Lastly, related to the characters of China's real estate market and stock market, the paper makes some suggestions for China's investment market supervision and macro-control.