Research On The Correlation Between RMB Exchange Rate And Stock Market Price In China

Since July 21,2005, China had began to implement the Exchange Rate Reform, which showed that RMB exchange rate would no longer tacked to the single US dollar, but would refer to a basket of currencies. Since then, the exchange rate is based on the market's supply and demand, and the managed floating exchange rate system would come into force.RMB exchange rate is in presence of hiking trend after this reform, especially from 2007,the rate began to climb up in a dramatic way. At the same time, the stock market was also undergoing a reform of non-tradable shares; the stock price can reflect the function and force of the market in some way. Eventually, the RMB exchange rate and Shanghai composite index shared the same trend of climbing. As two important financial markets, research on the relation of the exchange rate and the stock price is emerging as the times require.The RMB exchange rate fluctuates more often and widely after the reform, which makes no matter overseas or domestic investors, should take the fluctuation of the rate into great consideration, because it would affect investors'portfolio, the whole Chinese capital market and the prices of the financial assets. Meanwhile, the tendency of every kind of assets'prices in the Chinese markets would also cause the change of strategy in the investment and affect the supply and demand of RMB assets, at last, the exchange rate would become float. So there should be some kind of relationship between exchange rate and stock price. However, because of the differences of operating characteristics, the scale of development, Economic Structure and the development of exchange market and stock market existed in the different countries; existing empirical researches on the correlation between the two variables don't come to a uniform conclusion. It is just the presence of diversity that makes the study even more rich and complete.After reading the former studies, I got my own logical thinking of this issue. A theoretical analysis is dispensable. It is confirmed that some kind of correlations does exist between the exchange rate and stock price firstly, and then try to use empirical methodology which embrace Granger Casualty Test and Cointegration Test to do the test. Test results show that there was no Granger Causality and cointegration between the nominal exchange rate and Shanghai composite index before the reform, while there is a reverse one-way Granger Causality and cointegration between the nominal exchange rate and Shanghai composite index. In conclusion, there indeed exists a correlation between Chinese stock price and RMB exchange rate, but it is still a kind of transitional correlation, not flow-oriented or equity-oriented model. Finally, on the basis of the results of the empirical study, the article try to afford some instructive suggestions on how to improve and perfect China's exchange rate system and stock market.