Money supply is an important macroeconomic variable closely related to CPI, nominal GDP and other indicators, while the stock market and housing market are the main direction of China's capital flow and play an important role in the entire national economic and financial system. They are not only closely related to people's lives, but also affect the direction of the national economic situation. This paper focuses on the analysis of the linkage and interaction between money supply and liquidity and the stock market and housing market, in order to discover the law and explore the correct policy direction.
Money supply is closely related to the country's overall economic situation and its development. After the reform and opening up, China's economy as a whole has developed rapidly, and the financial market has undergone tremendous changes. The money supply has also undergone a series of changes. The relationship between the money supply and the real economic variables also determines the monetary policy of a country. And the insufficient money supply will also restrain the healthy development of the economy. Therefore, stable and moderate monetary policies have a significant impact on the overall national economy.
Money supply is defined as the financial process by which the banking system of a country or currency area inputs, creates, and expands money into the economy. Money supply refers to the sum of money outside the government and banking system held by households and firms at a given point in time in a country. China's current monetary statistical system divides the money supply into three levels: cash in circulation refers to the sum of the cash on hand of each unit outside the banking system and the cash held by residents.
In the narrow sense, the money supply refers to the demand deposits of enterprises, government agencies, organizations, troops, schools and other units in Banks. In the broad sense, the money supply refers to the M1 plus the time deposits of enterprises, government agencies, groups, troops, schools and other units in Banks and various savings deposits and securities deposits of urban and rural residents in Banks.
Among these three levels, M0 is closely related to consumption changes and is the most active currency, while M1 reflects the changes of enterprise and household capital tightness and is the leading indicator of economic cycle fluctuations, with liquidity second only to M0. M2 liquidity is the weakest, but it reflects changes in social aggregate demand and future inflationary pressures.
The stock market has low transaction cost and strong liquidity, and is sensitive to the response of monetary policy. As a kind of virtual asset, the price fluctuation of stock is determined by the discount value of future expected earnings, which makes the price fluctuation higher than that of physical asset. The fluctuations of stock prices are influenced by macro factors and special factors of stocks, which in turn have an important feedback effect on the macro economy. Money supply is an important variable of monetary policy and also the main index to measure money liquidity. Therefore, it is of great significance to conduct theoretical analysis and research on the interaction mechanism between money supply and stock price fluctuations.
Rising share prices, because of the wealth effect, generally increase demand for money, making money more liquid. As the nominal value of virtual assets rises, their yields rise and monetary returns are relatively low, residents and institutions are temporarily willing to hold more cash and demand deposits in order to invest in the stock market in a timely manner and earn rising price spreads and dividends. So M0, M1 increase, monetary liquidity increases. On the other hand, rising asset prices increase the opportunity cost of saving and bring down the money supply due to the substitution effect of assets and money. In general, the wealth effect of assets is greater than that of assets, and the influence of stock price on monetary quantity is positive.
n the one hand, when the central bank to implement monetary policy, people own money increase, diminishing returns of investment, the monetary unit and lower interest rates, under the condition of other things being equal, people own money will beyond the need of daily transactions, the result would lead to some money into the stock market to seek profits, demand growth, stock market prices. On the other hand, when money supply increases, interest rate decreases and investment increases, and through the expansion of multiplier effect, the intrinsic value of stocks increases and the investment yield increases, thus stimulating the rise of stock prices.
China's stock market promised not to circulate when state shares and legal person shares were listed before 2001. As a result, only tradable shares were traded in the market according to the share price, while the index was weighted according to the total share capital, thus forming the characteristic of "controlling more with less" in trading. After 2001, the China securities regulatory commission gradually proposed to solve the problem of non-circulation of state-owned shares and revitalize state-owned assets. However, due to the initial stage of listing and issuing, circulation shareholders bought tradable shares with ultra-high price-earnings ratio, and these plans have more or less damaged the interests of circulation shareholders, so the market reacted to the reform of "state-owned share reduction" with a bear market. Later, under market pressure, the China securities regulatory commission announced that it would suspend the reform of "state-owned share reduction". In 2005, China securities regulatory commission (CSRC) once again proposed the "reform of non-tradable shares", which, in essence, still means the reduction of state-owned shares. The difference is that the reform aims to eliminate non-tradable shares, and even the circulation of legal shares is included in the reform, thus causing a great deal of disagreement in the market. The market's divisions over the share separation reform remain huge. As we can see in the figure above, from January 2001 to October 2006, the stock market has been in a relatively depressed state, and the cumulative rise is negative. However, after more than one year's adjustment and adaptation, people's expectation of stock market rise is stronger than ever due to the strong Chinese economy and the share allocation. In October 2006, China's stock market experienced a strong rise, which exceeded the rational level. In September 2007, the market began a round of collapse, which was also the process of realizing the asset bubble and returning to rationality. By October 2008, the market was back to where it was before the boom. It can be said that after 10 years of adjustment and adjustment to the doldrums, China's stock market has entered a more rational stage. Therefore, we focus on the mature and rational stage from January 2008 to September 2010 to analyze the linkage relationship between monetary liquidity and stock market.
Using the actual data, we can see that, as analyzed above, the index is positively correlated with M1 and M2 on the whole. The stock market of the slower growth stage of M1 and M2 is also in the doldrums. The stock market performs well in the growth stage of M1 and M2. Since October 2008, the subprime mortgage crisis in the United States turned into a financial crisis, which affected the Chinese economy. Then the Chinese government introduced a series of rescue measures, injecting liquidity and adopting a loose monetary policy. From April 2009 to April 2010, China's money supply increased at an all-time high. Increased liquidity in the market, while driving up the stock market, the cumulative growth rate of the stock index back to positive in September 2009.
After October 2008, we still focus on the shear difference between M2 and M1 growth rate and the change of stock index. In the comparison and analysis diagram of the above figure, the relationship between stock market and monetary liquidity is more obvious. After that, the difference of m2-m1 is negative, resulting in negative shear difference, strong monetary liquidity, and good stock market performance. This feature even showed in January 2005 to January 2007, when m2-m1 was large and liquidity was insufficient, the cumulative rise of the stock index almost reached the lowest point.
Money liquidity and stock market influence each other. To keep the stock market relatively stable, it is necessary to make timely adjustment of monetary policies to maintain the stability of money supply and coordinate the proportion between different liquid currencies, namely M0,M1 and M2. The stability of the stock market also provides an important guarantee for the currency to maintain its moderate liquidity.
Before we start to discuss the correlation between M0, M1 and M2 and the real estate market, we first turn to the United States to discuss and explore the subprime crisis in the United States from the perspective of monetary liquidity and real estate bubbles. In 2000, when the U.S. Internet bubble burst and the 9/11 attacks hit the U.S. economy, the stock market was depressed and stock indexes plummeted. In order to stimulate the economy, the federal reserve began to implement active monetary policies and reduce interest rates. By June 2003, the federal funds rate was reduced to 1%. With the base rate, mortgage interest rates kept falling, and the U.S. housing market was booming. The middle and lower classes in America have no good credit and can buy a house without much down payment. High liquidity is also driving home prices, and the property boom has led to rapid growth in construction and fitting-related upstream and downstream sectors, supporting a strong U.S. economy. The result of this development is excess liquidity in the United States, with the risk of economic overheating and inflation. So in June 2004, the U.S. started to pull back. Interest rate rise, make homebuyer prohibitive, the capital that buys a house exits market toward, house price falls. At the same time, rising interest rates have made subprime mortgage holders unable to pay their loans, foreclosed homes have entered the market, increasing the supply of homes and falling house prices. Next, as we all know, financial institutions holding subprime mortgage debt are facing debt pressure and even bankruptcy risk.
From this example, we can clearly see the impact of monetary liquidity on the real estate market and the reaction of the real estate market to monetary liquidity. In an economy with large money supply and strong liquidity, capital pursues profits and pours into the real estate market, driving up the price of housing. The expectation of rising house prices will attract liquidity into the housing market. When liquidity is insufficient, capital is withdrawn from the real estate market and house prices fall. The prospect of falling house prices has further encouraged capital flight.
Among the indicators to measure the amount of money, the scale of M0 is relatively stable, which is closely related to the change of consumption. M1 is mainly the demand deposit of enterprises, which reflects the changes in the tightness of enterprises and household funds and is a leading indicator of economic cycle fluctuations. M2 reflects the change of social aggregate demand and the pressure of future inflation. And the volatility of M1 directly reflects the comfortable degree of enterprise funds, if the enterprise funds, balance a lot of money in the bank current account, M1, fast-growing economy, enterprise management activity, on the contrary, if the enterprise funds nervous, current insufficient funds, so use time deposit, M1 decline or even negative growth, has always been a fall in the boom of economy, enterprise management difficult, so the M1 is a leading indicator of the economy. This paper USES the rise and fall of the home sales price index to measure the state of the real estate market. The house sale price index is the relative number that reflects the change degree and trend of the house sale price in a certain period. Changes in sales prices of commercial, public and private houses. As can be clearly seen in the figure below, there is a profound relationship between M1 and housing.
From March 2001 to September 2009, the figure below is a comparison of the housing sales price index growth rate and the growth rate of M1 and M2. It can be seen that the housing sales price index growth rate is basically positive, which is well fitted to the growth curve of M1. The housing sales price index growth rate has a time lag of about one year for the growth rate of M1. Using the comparison chart of m2-m1 and house sales price index increase, we can see that the two are negatively correlated. When m2-m1 decreases, it indicates that liquidity is enhanced. After a time lag of about half a year, the housing market starts to strengthen. M2 and M1 growth, liquidity is abate, house prices will fall, this is particularly evident in early end of 08 09 performance, with the development of the us subprime crisis to the financial crisis, and spread to China, China's export decline, recession and deflation pressure, the monetary liquidity, the housing even stopped long rally, and have dropped slightly.
Money liquidity, especially M1, has a significant impact on the real estate market. Money is illiquid and the housing market is depressed, with a lag of six months to a year. Therefore, the government can adjust the monetary policy to regulate the real estate market, but it will take some time for the policy to be effective.