China's Monetary Policy And The Stock Market

Since the 1990s, with the rapid development of China's stock market, the stock market has played a great role in direct financing for Chinese enterprises, but the frequent fluctuation of the China's stock price brings a lot of shock to the development of our national economy .The credit funds entering the stock market illegally posed a great challenge to our country's monetary policy formulation and implementation. So, the currency demand of stock market must be considered in making monetary policy. How to develop the stock market better and how to make monetary policy more accurate according to economic conditions is why the author writes this paper.This article has got some suggestions from predecessors'studies on this problem, also absorbed some better research methods. Through the theoretic analysis and empirical analysis to the correlation of the monetary policy and the stock market, we choose the latest economic data, and use the research methods, such as ADF test, cointegration test and impulse response and variance decomposition. The author has studied both the influences of the money supply to the stock market and the influences of the stock market to monetary policy. Through the research the author has found the increasing of money supply can lead to the rise of the stock price and that the rising of interbank lending rates can also lead to increase of the stock price. When the economy is in good conditions, investors will anticipate the profits, as a result, interest rates will lead to rising in stock prices , but interest rates can also lead to a falling in the long time when considering the rising costs and portfolio substitution benefit .This phenomenon can be interpreted as interest rates on stock market hysteresis. so we should speed up the reform of China's market-oriented interest, make interest rates better play the role of optimizing the allocation of resources.Through empirical analysis ,we found the stock turnover has some influences in currency demand. The boom of stock market can lead to the increasing of the demand for money. But the influence is not the same between M1 and M2 . At last ,we draw the conclusion that we should give full consideration to the demand for money in the stock market. But we also found the effect of monetary policy transmission is not strong, so we should build up the transmission channel between the stock market and monetary policy,in order to enhance the ability of monetary policy in the control of economy.