The Statutory Deposit Reserve Ratio To Adjust The Effect Of The Chinese Stock Market

The Required Reserve Policy is a powerful monetary policy which can change the money supply quickly, even achieve the ultimate goal of the monetary policy rapidly. However, the adjustments of Required Reserve Ratio has a strong impact on the economy which lead to adverse outcomes. So western countries are downplaying its role,set very low Required Reserve Ratios even equal to zero. But the central bank of China uses this monetary policy tool very frequently. The special using of Required Reserve Policy is mainly because the financial market is immature, a lot of monetary policy tools can't be effectively used without the interest rate liberalization, and the central bank doesn't have sufficient operating experience. This paper focuses on the reasons of the frequent adjustments of the Required Reserve Ratio and the impacts on China stock market.This paper discusses the effect of the adjustment of the Required Reserve Ratio to the stock market in economic theory. Then build a multiple linear regression model which uses the least squares method to estimate parameters and the method Newey-West(1987) proposed estimate the variance. Then analyze and compare the effect to the stock market of the announcement and the implementation of the Required Reserve Ratio, and compares the effects to the stock market and to the financial sector. We found that the announcement of the raise of the Required Reserve Ratio has no effect on the stock price index, the announcement of the reduce of the Required Reserve Ratio makes it lower down, which is contrary to the economic theory. We also found the that the announcement of the adjustment of the Required Reserve Ratio has a bigger effect to the financial sector. This is because the adjustment directly affects the credit founds of the banking system, which makes the financial sector more sensitive to the adjustment of the Required Reserve Ratio.The innovation of this paper is: separate analyzing the announcement and the implementation of the Required Reserve Ratio and founding the stock market's actual response is deviation to the economic theory. The empirical results show that the monetary policy transmits badly through the stock marker. It mainly because that the interest rate liberalization is not achieving yet, the reserve system is inadequate, the stock market is immature, and the foreign exchange is expanding too fast which makes the adjustment of Required Reserve Ratio can't change the money supply so effective. This paper gives several suggestions such as speeding up the interest rate liberalization, improving the reserve system, and expanding the scale of the stock market.