Analysis On The Impact Of RMB Appreciation On China's Stock Price

Along with the reform and opening-up, China's economy began to develop rapidly, the level of opening gradually upgraded, China's foreign trade cooperation with the rest of the world has continued continually, and external dependence increased. International trade has remained long-term double surplus and international reserves have enlarged, and RMB faces a great pressure of appreciation at the same time. The people's bank of China on July 21,2005, announced that China began to implement the basis of market supply and demand, reference to a basket of currencies conditioning, a managed floating exchange rate system. The RMB appreciated 2.1% on that day. RMB has appreciated from 8.11% to 6.62% against dollar since July 22,2007, appreciated by 18.7%. In May 2005, China's stock market has also undergone significant reform of non-tradable shares, which greatly increases the supply of the stock market. Two years later,both China's stock market and exchange rate have raised grately.But the huge impact from the 2008 international financial crisis for the Chinese capital market, influenced the country's stock markets tremendously, also hit China's domestic economy to some extent. Therefore, making a detailed analysis on the impact of RMB appreciation to the stock market of our country, helps us better understand the linkage of the China's financial market mechanism, plays a certain role for preventing financial risks, maintains financial market stability, and improves Chinese stock markets and foreign exchange markets.This thesis based on the flow-oriented models, analyzes the influence of exchange rate to stock price and transmission mechanism between them. On this basis, this paper employs monthly data of macro financial variables from 2006 to 2011, and uses co-integration test analysis, Granger causality test and constructing VECM model, respectively to make an empirical analysis on the long-term and short-term relationship between the exchange rate of the Yuan and the stock index, Also provides corresponding policy advices and suggestions based on the combination of theory and empirical conclusions. This thesis includes five parts:Part 1, Introduction. This section discusses this thesis's research background, purpose and significance, etc., and summarizes the content and research approach, features.Part 2, Literature Review. This section classifies the theory and empirical research in the world. The theoretical studies include two parts:one is to expand the analysis framework of the traditional macroeconomic general equilibrium,and combine certain micro variables, the exchange rate and share price to analyze general equilibrium status; the other one is to analyze the relationship between exchange rate with stock price by microeconomic level, including concerns on the portfolio balance framework of international financial market arbitrage, and the general equilibrium analysis framework combined with micro basis and open economic condition. Moreover empirical studies include the research on the correlativity and the causality of exchange rate and stock price. The correlativity research lends to a conclusion of uncorrelated, positive and negative relation between the exchange rate and stock price; and the causality research gives to the conclusion of one-way causality from exchange rate to stock price, stock price to exchange rate and their bidirectional causality.Part 3, Basic Theory. This part illustrates the basic theory which is the interaction between the stock sprice and exchange rate, including flow-oriented models and stock-oriented models. In-depth analyzes the transmission mechanism of exchange rate to stock price through four aspects, which are the money supply intermediary, interest rates intermediary, international trade intermediary, international capital flows intermediary and expectations. At last, several models are introduced to discuss the feedback effect of stock price to exchange rate.Part 4, Empirical Research. This section use Granger causality tests and co-integration analysis method to analyze causality and long-run equilibrium relationship between RMB exchange rate and Shanghai a-share and b-share index firstly. Then build VEC models to analyse short-term effects of RMB appreciation on Shanghai a-share and b-share index.Finally.use Granger causality tests to inspect the transmission path of them and use co-integration analysis method to discuss their mechanism action.Part 5, Conclusions and Policy Recommendations and Limitations. This section combines theoretical analysis and empirical conclusions, and gets the conclusion as follows:Fistly,there exists a long-run equilibrium relationship between RMB exchange rate and Shanghai a-share and b-share index.Secondly, Shanghai a-share and b-share index feedback effects on RMB exchange rate.Thirdly, RMB appreciation effects Shanghai a-share index though two intermediary,including money supply and international trade, While RMB appreciation effects Shanghai b-share index only though international trade intermediary. On the basis of the conclusion, it puts forward corresponding policy recommendations.This thesis scientifically analyzes in detail the effect and mechanism of RMB appreciation to the stock price, and obtains relatively rational conclusion.