Research On The Impact Of The RMB Exchange Rate Fluctuations On The Chinese Stock Market Price

Since July 21, 2005, China has implemented a regulated, managed floating exchange rate system based on market supply and demand and in reference to a package of currencies instead of pegging to the single USD. The RMB exchange rate has kept increasing since RMB exchange rate reform. From RMB exchange rate reform to the end of October, 2007, the Chinese stock market price also kept going up. However, after that, the stock market experienced the most terrible winter. The RMB exchange rate reform leads RMB exchange rate to more fluctuations. It makes the investors, no matter whether they are domestic investors or foreigners, adjust their own portfolio, then which can affect the prices of all the financial assets in the Chinese capital market. Exchange rate and stock price are not only references of microcosmic decision-making, but also important indicators of national economic strength. So the research on the impact of the RMB exchange rate fluctuations on the Chinese stock market price has important significance.Starting from the basic theory, this paper makes a thorough analysis of the impact of exchange rate fluctuations on stock market price and transmission mechanisms by using the method of combining macroscopic and microcosmic perspectives. Employing the general equilibrium analysis, it derives a calculus formula from a new framework which is developed from Mundell-Fleming model in the open economy by introducing stock market. Then with the specific situation in China, this paper analyzes the impact of the RMB exchange rate fluctuations on the Chinese stock market price profoundly. The paper maintains that our focus should be put on to decide whether the exchange rate influences the stock market price. Our first task is to affirm this impact. As soon as we confirm that the impact exists, we can take the next step to study the impact in details. According to the above method, this paper investigates empirically the impact of the RMB exchange rate fluctuations on the Chinese stock market price by using time series analysis method.Based on the analysis, this paper reaches some conclusions as follows: First of all, we check the existence of the impact of the RMB exchange rate fluctuations on the Chinese stock market price by employing the GARCH model and Event Study method. Next, we use other empirical methodology to investigate the impact in details, since the impact has been affirmed in the first step. Though, a long-term equilibrium relationship doesn't exist between the RMB exchange rate and Chinese stock market price. The empirical analyses of this paper show that there is a little impact of the RMB exchange rate fluctuations on the Chinese stock market price. Finally, according to these conclusions as well as the present situation of China, this paper puts forward some policy suggestions for promoting the development and improvement of China's foreign exchange market, stock market and transmission mechanisms.