Analysis On The Correlation Between RMB Exchange Rate And Stock Market Prices In China

The links between financial markets become more closely, share price which belongs to capital market and exchange rate which belongs to money market are important financial variables, close attention has been increasingly paid to the relationship between share price and exchange rate. Since July 21, 2005, China began implementation of the exchange rate reform. That is, the appreciation of the RMB exchange rate becomes a reality. The RMB exchange rate against the dollar has appreciated total of 13.3 percent by December 28, 2007, in addition, this trend has still accelerated. Compared to the appreciation of the RMB exchange rate, China's stock market almost has started a bull market for more than two years, with RMB exchange rate reform. Shanghai Composite index rose to more than 6000 points while it is only 1000 points in June, 2005. However, the stock market accumulates huge risks as a result of the rocketing price of shares. From then on, China's stock market goes into a rare adjustment, from above 6100 points in mid-October, 2007 to 3100 points below in April, 2008.The appreciation of the RMB exchange rate and the formation of the stock market bubble is very similar to that of Japan. So China will head for crisis? What is the relationship between RMB exchange rate and stock market prices? It is necessary to discuss deeply the two financial variables which involve hot topics.Based on theoretical analysis and empirical analysis on the correlation between RMB exchange rate and stock market prices, reached the following conclusions: Firstly, before"7·21ERR", the RMB exchange rate will have a direct and indirect impact on China's stock market prices, China's stock market prices could have only indirect impact on the RMB exchange rate. There is a one-way causal relationship from RMB exchange rate to China's stock market prices. After"7·21ERR", there is a one-way causal relationship from China's stock market prices to RMB exchange rate. Secondly, along with the deepening of RMB exchange rate market-oriented and enhancement of the elasticity of exchange rate, the correlation between exchange rate and stock prices becomes relatively significant. In conclusion on the basis of China's exchange rate through the status of stock analysis, the author puts forwards the corresponding policy recommendations to ensure that China's financial system develops healthy, prevent and reduce the possibility of financial crisis.