Empirical Research On The Relationship Between Money Supply And Stock Prices In China

There is no doubt that the stock market has been an essential part of Chinese finance market, and has more and more important status in the whole economy, so the development of the market attracted much attention. The investors pay attention to the profits the stock market gives to them, the public companies attached great importance to the running of the stock market from the angle of financing as well as the angle of long-term strategy, and government as the macro regulator made relate policies to make sure the stable development of the stock market. What’s more, more and more researchers attempt to make study of the relationship of the monetary policy and the stock market in order to apply basis of theory and reality. As the most important intermediate targets, what relationship did the money supply have with the stock price? What’s the effect of the policy the government made to regulate the price of the stock? It has important theoretical and practical significance, which is the article paying attention to.Firstly, this article expounds some classical theory about the relationship between money supply and stock market prices, such as the wealth effect theory, Tobin q theory, theory of assets and liabilities, and has carried on simple introduction of the research results at home and abroad. Reviewing precious research we find out that, due to the different methods and diameter of the research and the particular economic environment of different countries, the result is not the same. On the one hand, we think that there is relationship between the two; on the other hand we think there is no relationship. Arrounding the social and economic environment of our country, we need further research.Secondly, this article has analyzed the stock market price movement of our country and found out that the price fluctuation of the stock market in China has a lot of problems, during the period, the central bank’s tighten or loose monetary policy had an effect on the stock market, which suggests that changes in the money supply will cause the changes of stock prices. Then, we analyze the relationship between money supply and stock prices from the theoretic aspects. The stock prices influence the money supply through the wealth effect, trade effect, portfolio effect and substitution effect. The money supply affects stock price through the deposit reserve ratio, rediscount rate and open market operations directly and affects it through the interest rate transmission mechanism, the portfolio effect, price expectations effect and inflation effect indirectly.Moreover, this article carries the empirical research on the relationship between the money supply and stock prices, selects different level variables of the money supply, the Shanghai composite index and conducts co integration test and causality test. It shows that only the narrow money supply has long-term equilibrium relationship with Shanghai composite index and Shenzhen component index, however, the cash in circulation, the broad money supply, and monetary liquidity structure index does not exist it with that two index. But those two indexes are the Granger cause of narrow money supply and the change of monetary liquidity structure index.Finally, I make a simple description and analysis of the above results in this paper and put forward three specific policy proposals, including monetary policy should focus on the stock market; through improving the policy instrument in the money supply and the flexibility of the policy to reduce the time lag; government should promote the further reform of the stock market and improve it through system itself, the listed companies and investors. I hope that this article can make a meager force to the research of the research of the relationship between the monetary policy and stock market.