Study On Excess Liquidity In China And Its Price Effects In Stock Market

In recent years,with our long-term international trade surplus,the rapid development of national economy and the appreciation of RMB Exchange rate,excess liquidity has become one of the main macroeconomic problems in China today.On the other hand, Chinese stock market has stepped in a magnificent bull market since June 2005,the rising speed of stock is unprecedented in history.Is Chinese excess liquidity resulting in such a large increase?What's the relationship between them,then?This paper attempts to find out the relationship by empirical study.In this paper,we start from the definition of excess liquidity to comprehensively describe the excess liquidity problem in China and conclude that there is excess liquidity in China.Then,we carry on the study on excess liquidity in China and its price effects in stock market. On the basis of theoretical analysis,we choose the quarterly data of variables,such as money supply,liquidity indicators,interest rate and stock market index,from the first quarter of 2005 to the fourth quarter of 2007,for empirical study. Finally,we analyze the cause of excess liquidity and give the countermeasures to excess liquidity and asset price bubbles in our country.On the basis of theoretical research and empirical analysis,we draw the conclusions:1. There is serious excess liquidity in recent years in China and have had an impact on our economy and stock price.2. Liquidity lagging behind three periods affects the stock price significantly. Through variance decomposition technology we find liquidity is the most important variable to explain the fluctuation of our stock market.3. Chinese stock market is a capital-driven market,which also explains why Chinese stock market trend volatile from the development of national economy for long-term.