An Empirical Analysis Of Effects Of RMB Exchanges Rate’s Movements On The Chinese Stock Market

As the most important variable that connects the domestic and foreign markets, exchange rate plays a vital role in the economy of a country. It has been almost 9 years since the new RMB exchange rate regime started from July,2005. The exchange rate of RMB against US dollar has been appreciating over the 9 years. During the same period, Chinese stock market had experienced a significant growth before the financial crisis, and afterwards, declined sharply. After November 2008, the stock index picked up a little bit and has been in line for some consolidation for the last couple of years. This paper selects the daily data of CSI300 and the exchange rate of RMB against US dollar from the date that new exchange rate regime started to March 7,2014 and establish some empirical models attempting to analyze the mechanism of exchange rate to stock market that is constantly fluctuating.We found that for the whole sample, there is no long-term equilibrium relationship between stock market and exchange rate while after November,2008 there exists co-integration relationship. Therefore, we focused on this part of the sample, applying ECM, VAR model, GARCH model for empirical testing. We found in short terms, the depreciation of exchange rate has a negative impact on the stock market, while that’s not the case for a long term. The fluctuation of both stock market and foreign exchange market shows an ARCH effect, while there is no significant evidence that they are correlated. In addition, in the intermediary test of mutual impact between exchange rate and stock market we found that Sino-US interest spreads, the M2 and net exports cannot be significantly considered as the transmission intermediary of exchange rates and stock mutual influence, expect CPI.In the future, with the continuous reform of China’s economy, the market’s functions will be more and more important. Mechanism of exchange rate to the stock market will has been further improved, and the correlation between them will be more and more significant. In the history, both in the developed countries and some emerging economies, changes of exchange rate often lead to fluctuations in the stock market, and then probably affected the whole economic system. Therefore, it is very important to take the linkage between exchange rate and stock market into consideration when set policies in order to minimize the finance risk from both the internal and external aspect.