Stock Market, Exchange Rate and Chinese Money Demand

The paper examines the long-term relationship among RMB exchange rate, stock market, interest rate, consumption, general real money balance and their dynamics from 2000 to 2009 by employing Johanson and SVAR methods. The result shows: exchange rate and stock market have significant effects on long-term money demand. In short run, RMB appreciation expectation leads to net increments of real money balance and stock market variation increases real money demand at the first two month. Only small part of the huge international capital caused by RMB appreciation expectation flows to Chinese stock market. The policy suggestions are as follows: Chinese monetary authority should consider exchange rate and stock market when implementing the m₂-aiming monetary rule. In the circumstance of increasing RMB appreciation expectation, the interest rate marketization process should be sped up and interest rate adjustment could moderate the shock of real money balance bought by exchange rate fluctuations.