A Study On The Performance And Reasons Of China’s Stock Price Deviation From Economic Fundamentals

It has been gradually found that share prices in China are not exactly same as that offoreign mature stock markets which are consistent with economic trends, and evensometimes shows a deviation. This paper mainly introduces the relationship between theindex of China‘s stcok prices and economic cycle on behalf of macroeconomicfundamentals, monetary policy that on behalf of policy fundamentals, and company profitsthat on behalf of microeconomic fundamentals. We attempt to examine the relationshipbetween stock prices and these indicators, verifying whether stocks deviate fromeconomic fundamentals in China. For finding the cause of the stock market s downturnhas a powerful effect in the development of China’s capital market.This paper is divided into five parts.The first charpter is for the introduction. Thisarticle introduces the topic of the meaning and background to carry out a literaturereview.The second charpter shows the relationship between the index of China‘s stcokprices and economic cycle and the correlation coefficient between them is negative. Sincethe absolute value is not big, it could not illustrate that there is serious deviation. So wemade further analysis based on graphs to find that obvious deviation lasts for a very longperiod of time. In the third chapter, we explored the relationship between the index ofChina‘s stcok prices and money supply, which presents apparent deviation. From the yearof1992to2007, it has always exhibited significant deviation between the index ofChina‘s stcok prices and money supply. In the forth charpter we also made a research onthe relationship between the index of China‘s stcok prices and company profits, whichexsists a deviation but not obvious. We explore the reasons why s tock prices havedeviated from economic fundamentals. It mainly concludes into three points as follow:firstly it becauses of rules and regulations including overmuch government control, sizecontrol of stock market and incomplete non-tradable shares; secondly it reslults fromexcess speculation in China‘s securities market; thirdly serious manipulation in China‘ssecurities market also plays a role.