The Analysis of the Impact of Monetary Policies on Chinese Stock Market and Foreign Exchange Market

Abstract

With the further advance in economic globalization and reform and opening up, macro-regulation has significant influences on China’s financial market. China’s stock market and foreign exchange market are important branches of the financial market. This paper explores the heterogeneous effects of expansionary and contractionary monetary policies on the A-share market through disparate transmission channels, including liquidity, interest rate, risk premium, and profit expectations. It analyzes how these policies influence market returns, volatility, and valuation levels across different industries, with highly leveraged and high-beta sectors being more responsive. Additionally, the paper examines the pathways and extents of monetary policy impacts on the RMB exchange rate level, volatility, and risk premium, highlighting the role of interest rate differentials, market expectations, and capital flows. Furthermore, it proposes corresponding policy recommendations and improvement methods to enhance the effectiveness of macro-regulation and maintain financial stability. The findings provide valuable insights for policymakers and investors in navigating China’s complex financial environment.