Empirical Study On The Impact Of The Deposit Reserve Rate Changes In China On A Listed Company’s Stock Price

With the continuous development of economy and the deepening of financialreform, the legal deposit reserve system has become a monetary policy tool whichmonetary authorities use to control credit and regulate the money supply in theeconomy. In the world, as some countries have gradually given up the money supplywhich is the goal of monetary policy, leading to the statutory deposit reserve rate showa trend of gradually reduce. However, in China, money supply is the intermediatetarget of monetary policy and coupled with non-market interest rates, these determinethe effectiveness of the deposit reserve policy will have on the implementation ofmonetary policy. The deposit reserve system was established in1984in China and theCentral Bank had adjusted the legal deposit reserve rate45times during since itsinception. From January2010to June2011, the deposit reserve rate was incrementallyraised12times to a record high. The Chinese Central Bank frequently uses the depositreserve system to regulate monetary policy and this has attracted the attention of manyscholars in and outside China. It is in this context that this paper attempts toempirically analyze the impact of the changes in the deposit reserve rate of China onthe stock price of listed companies in different industries and areaes.Based on summarizing the deposit reserve policy effectiveness, this paperdescribes the basic content and mechanism of action of the deposit reserve policy,analyses the advantages and limitations of the policy. From the perspective of bothindustries and regions, this paper establish a binary regression model to research theeffect of the changes in China’s deposit reserve rate on a listed company’s stock pricein different industries. In the analysis of different industries, a sample of45Firmswere selected from the labor intensive, capital intensive and technology intensiveindustries to compile an empirical analysis on the impact of the changes in the Chinesedeposit reserve rate on the share price of these companies. The results show thatcompanies in the capital intensive industry are sensitive to the deposit reserve rate changes. The influence of the deposit reserve rate on companies in the technologyintensive industry is not significant on the whole; while the companies in the laborintensive industry, which doesn’t have a high level of capitalization, are not sensitiveto the deposit reserve rate changes in China. In the empirical analysis of differentregions, the results indicate that there are big differences between China’s East andwest area enterprises in response to changes in the deposit reserve ratio. The influenceof deposit reserve policy in the western region is weak, while is quite strong in theeastern region, which shows that China’s deposit reserve policy exist regionaldifferences. Finally, in the basis of theoretical and empirical analysis, this paper givessome suggestions to improve the effectiveness of the deposit reserve policy.