Research, China's Exchange Rate And Stock Prices

On July 21,2005, China's exchange rate system underwent major reforms introducing a market-based, managed floating exchange rate system with reference to "a basket of currencies". In the same year, China's stock market also had far-reaching reforms, implementation of the equity division system made the price formation mechanism of the stock market much more market-oriented, stock prices reflect more comprehensive market information, so that the linkage between exchange rate and stock prices was strengthened, and more and more attention was drawn from academics for studying their relationship. In the current context of continuous appreciation of RMB, clarifying the interaction mechanism between exchange rate and stock prices can effectively prevent the adverse effects caused by currency appreciation on the financial markets.This paper uses both the theoretical and empirical ways to analyze the relationship between RMB exchange rates and stock prices. In the theoretical way, this paper first introduces the existing studies carried out at home and abroad, and then makes a brief overview of the related theories about exchange rate determination and exchange rate regime. On the basis of the above theories, two kinds of mature theories are introduced to illuminate the relationship between RMB exchange rates and stock prices:flow-oriented models and stock-oriented models. Following this, this paper gives a detailed analysis of the channels which the exchange rates is passing through to impact the stock price. In the empirical way, this paper uses the cointegration test and causality test etc which are commonly used by domestic and foreign scholars in the analysis of this issue.Our conclusions are:First, there exists a long-term and stable negative correlation, as well as a one-way Granger causality relationship between the RMB/USD, RMB/HKD exchange rates and the A, B share stock prices; there doesn't exist any long-term equilibrium relationship, or Granger causality relationship between the RMB/JPY, RMB/EUR exchange rates and the A, B share stock prices. Second, the relationship between exchange rates and the A share stock prices is larger than B share stock prices. Finally, based on the above conclusions we put forward some policy suggestions on further improving the foreign exchange market and stock market in China.