The changing trend of monetary liquidity reflects a loose or tight monetary environment. The changing characteristics of asset prices under different monetary policy environments are the concern of every institutional investor, which has important practical significance.
The Economic Meaning of Monetary Liquidity
Currency liquidity reflects a basic situation of money supply. At the macroeconomic level, we often directly understand liquidity as the total amount of money and credit with different statistical caliber. Deposits of residents and enterprises in commercial banks, as well as highly liquid assets such as bank acceptance bills, short-term treasury bonds, policy financial bonds and money market funds, can be included in different macro-liquidity categories according to the needs of analysis. The indicators to measure the total amount of money are M0, M 1, M2, M3, etc. M0 refers to the cash in circulation. "Narrow money"-m1usually consists of cash circulating outside the banking system, cash held by the public and demand deposits of commercial banks. On the basis of M 1, time, a broad money, has increased the time deposits and savings deposits of commercial banks. M3 has increased the liabilities of non-bank financial intermediaries on the basis of M2. Broad money covers all kinds of money forms held by different financial institutions, which has well adapted to the needs of modern economy and has become an important indicator of monetary authorities in developed countries. . The Bank of China regularly announces the narrow money supply M0 and M 1, and the broad money supply M3.
The theory of money quantity points out the relationship between money supply and economic activities and price level, which can be expressed by Fisher equation: MV=PT. Where m refers to the money supply; V refers to the speed of money circulation; P refers to the average price level; T refers to the trading volume of goods and services. Theoretically, it is assumed that the velocity of money circulation (V) and transaction volume (T) will not change in a short time, so that the increase of money supply (M) will lead to the increase of price level (P) and inflation. The specific form of liquidity is deeply influenced by the changes of financial institutions and their actual activities, and its complexity and variability may make the relationship between money and economy, which is understood by traditional money quantity theory, unstable.
In recent years, the capital market and its derivatives market have developed rapidly. Many economists have suggested that money is used to meet the needs of all economic activities, including not only commodities in circulation, but also assets. Therefore, Fisher equation should be modified to MV=PT+S, where S represents the demand for money in the capital market. Another criticism of the traditional theory of money quantity is that many scholars believe that the velocity of money circulation (V) changes with the environment of economic and commercial activities, and it should not be assumed that it remains completely unchanged. These suggestions to improve the theory of money quantity reflect the development and changes of economic activities, and the basic laws revealed by the theory of money quantity are worth learning and continuing to explore.
The changing trend of monetary liquidity reflects a loose or tight monetary environment. The economic definition of excess liquidity is: the positive deviation between the actual amount of money in circulation and the amount of money needed in the state of economic equilibrium. Excess liquidity can be understood as money supply exceeding the need to maintain long-term price stability. According to the definition of excess liquidity, when measuring excess liquidity, we should first estimate the theoretical total amount of money in the state of economic equilibrium, and then calculate the difference between the theoretical total amount of money and the actual total amount of money, and get the specific value of excess or shortage. In practical application, it is difficult to determine what level of money supply is the most reasonable, and there are many debates in economic theory. Therefore, the excess of monetary liquidity we observed in practice is not absolute excess, but relative excess, that is, the development trend of loose or tight monetary liquidity.
We can use the ratio of money growth rate to nominal GDP growth rate to measure the changing trend of money liquidity. Assuming that the speed of money circulation is constant, if the growth rate of money supply and circulation speed exceeds the growth rate of physical objects and prices, the liquidity tends to be loose, and vice versa. In addition, we can also use the real interest rate level representing the price of money flow to measure liquidity. Interest rates fall, liquidity tends to be loose, and vice versa.
Theoretical explanation of the influence of currency liquidity on asset prices
Keeping the price level stable has always been the focus of monetary policy authorities and one of the ultimate goals of monetary policy. The monetary authorities' concern about the asset price level can be traced back to the American economic bubble in the 1920s, and further reflected in the high-tech stock bubble in the 1990s. In the above two stages (1923- 1929 and 1994-2000), the stock market index maintained an average annual growth rate of more than 20% in two six years, accompanied by a low and stable inflation level and a high real GDP growth rate. At the same time, money circulation and loans also grew rapidly in these two stages. These facts show that asset prices have a great influence on the economy, and also reveal that money supply is highly correlated with asset prices.
In recent years, major countries in the world have successfully controlled the price level of consumer goods at a relatively stable level. Federal Reserve Chairman Ben Bernanke once pointed out that the focus of monetary policy in western countries has shifted from inflation to asset prices. Ferguson, the former vice chairman of the Federal Reserve, also pointed out the reasons why the monetary authorities pay attention to asset prices: because asset prices are an important part of the transmission mechanism of monetary policy, abnormal changes in asset prices will lead to the failure of monetary policy to effectively affect economic activities; In addition, asset prices contain important information of monetary policy, which can be disclosed, and the central bank needs to ensure that the information disclosed is consistent with monetary policy. On the one hand, the monetary authorities pay more attention to asset prices, which reflects the important position of asset prices in the transmission mechanism of monetary policy. On the other hand, it also requires institutional investors to understand the mechanism of money supply on asset prices more clearly and grasp the market trend.
Theoretically, the influence of monetary liquidity on asset prices (including bond, stock and real estate prices) can be explained from the following aspects:
First, the transmission mechanism of monetary policy tells us that the improvement of liquidity will lead to the decline of short-term interest rates; Short-term interest rate decline will lead to long-term nominal interest rate decline; The decline in long-term interest rates led to an increase in stock prices. The usual practice of the current monetary policy of the Federal Reserve is to set a target interest rate according to the economic development, and then adjust the money supply (the supply of the Federal Reserve) until the Federal Reserve ratio reaches the target interest rate level. Suppose the Federal Reserve wants to lower interest rates and choose open market operation to buy bonds in the inter-bank market, which will lead to an increase in bond prices, a decrease in yield and a subsequent decrease in interest rates. The behavior of the Federal Reserve increased the Federal Reserve that commercial banks can hold, which in turn increased the amount of credit granted by commercial banks, and finally increased the total amount of money circulating in the economy.
The interest rate level can measure the price of money flow. Long-term interest rate is closely related to short-term interest rate, and the yield of bond assets (such as national debt) is an important standard to measure the level of long-term interest rate. Therefore, there is a theoretical basis for the decline of bond interest rate when liquidity increases. The decline of long-term interest rate reduces the yield of debt assets, and under the condition that the risk premium level of stock assets remains unchanged, it also correspondingly reduces the required yield of investors on stock assets. The reduction of the required rate of return on stock assets makes the current rate of return on stock assets exceed people's expectations. People put their money into stocks to raise the stock price and reduce the stock yield until it matches the required rate of return. The stock price depends on the supply and demand of the stock. When calculating the intrinsic value of stock (such as DDM model, the intrinsic value of stock = future income/required rate of return), the future income or dividend of the company represented by stock, as well as interest rate and required rate of return, all play a decisive role. (Becks and Kramer, 1999).
The decline of bond interest rate and the rise of stock price can also be explained by substitution effect. Money is profit-seeking. When the yield of bond assets declines, funds will enter the stock market to obtain high returns, until the entry of funds leads to the rise of stock price and the decline of yield, reaching the risk premium level of stock assets. In addition, the loose monetary environment after the increase of liquidity has raised the expectation of economic output, and also raised the expectation of corporate profits. The decline of the required rate of return and the increase of the company's profit expectation will increase the intrinsic value of the stock.
Second, the theory of money quantity shows that when the liquidity of money is higher than the needs of the economy, it will raise the price level. When the price index remains stable, asset prices will rise. This explanation is based on the wealth effect brought by money surplus, and the wealth measured by money owned by residents has increased; Wealth effect will be used to buy goods; If the price of consumer goods remains stable, then wealth will flow to assets and the price level of assets will rise. This explanation also applies to the relationship represented by the modern theory of quantity of money (MV=PT+S, where S represents the demand of assets for money). Money needs to meet the needs of all transactions, including not only consumer goods, but also assets. Judging from the two biggest stock market bubbles in American history (1923- 1929, 1993-2000), there are phenomena of price stability and asset prices rising sharply.
Many scholars have done a lot of empirical analysis on the mechanism of the influence of American historical conditions on monetary liquidity on asset prices, including:
Zhan Sen and Johnson (1995) used the change in the direction of interest rate adjustment as a criterion to measure whether the Fed tightened monetary policy or relaxed monetary policy. They analyzed the relationship between American stock returns and monetary environment during the period of 1962- 199 1, and found that the stock market is closely related to the monetary environment, and the stock returns are higher when the monetary environment is loose than when the monetary environment is tight. Patelis (1997) adopts different monetary policy variables, and draws the conclusion that monetary policy has an action mechanism on the stock market. Mashal (1992) analyzed the quarterly data of the United States during the period of 1959- 1990. He used the growth rate of M 1 and the proportion of consumption in GNP to measure monetary growth, and found that the real rate of return on stocks was weakly positively correlated with monetary growth. Convers, Jensen and Johnson (1999) found that the stock returns of some countries are significantly correlated with the US monetary policy, and some are even stronger than the domestic monetary environment. Baks and Kramer( 1999) studied the mechanism of currency liquidity in the international market. They found that the increase of currency liquidity in G-7 countries is consistent with the decline of real interest rates and the rise of real stock prices in G-7 countries. Bordo and Wheelock(2004) studied the major financial bubbles and financial crises in American history, and found that the formation of financial bubbles was generally accompanied by the excessive growth of currency issuance and bank loans.
Ferguson(2005) used M3 growth rate to express the change of money supply, and found that the correlation between the growth of money liquidity and stock price was limited, but it was highly correlated with real estate price. He believes that the statistical non-significance cannot deny the influence mechanism of monetary policy on asset prices. The reason for this result may be that the stock price fluctuates too frequently, and ordinary correlation analysis can't find the law.
Based on the previous analysis, a theoretical understanding has been reached on the mechanism of monetary liquidity affecting stock asset prices: loose liquidity plays an important role in promoting the stock market. On the one hand, the theoretical circle highly affirmed the correlation between the two, on the other hand, it is also seeking a breakthrough in statistical analysis methods.
Correlation Analysis of Currency Liquidity and Stock Price in China
(A) the main characteristics of China's currency liquidity
At present, China has basically established a basic currency (operational target) regulation framework with the ultimate goal of stabilizing the currency value and the intermediate goal of money supply. The current monetary policy orientation of the People's Bank of China is prudent monetary policy, and the monetary liquidity policy focuses on regulating the management of money supply (China People's Bank, 2005). According to China's current foreign exchange system, enterprises should sell the foreign exchange balance to designated foreign exchange banks, which is the so-called compulsory foreign exchange settlement and sale system. Foreign exchange banks must sell foreign currency funds other than designated foreign exchange positions to the central bank, making China's central bank a de facto recipient of the foreign exchange market, and the initiative of the central bank's liquidity management is relatively weak. The direct reason for China's abundant liquidity is that the central bank has increased the money supply to hedge its huge foreign exchange holdings. In this way, loose monetary liquidity has become an important feature of China's monetary policy in recent years.
First, the money supply accounts for a large proportion and the growth rate is very fast. Compared with other countries, China's money supply M2 accounts for a very high proportion of GDP, while the development trend of M2 only accounts for the proportion of GDP, showing an obvious upward trend. This reflects the loose liquidity of China's currency from one side.
Second, the comparison of money growth rate and GDP growth rate. Figure 3 shows the comparison of the growth rates of M2 and GDP in the past 15 years (199 1-2005). We can find that the growth rate of broad money supply in China has exceeded the growth rate of GDP in most years.
Third, the market interest rate shows a downward trend. China's interest rate formation mechanism is not perfect, and there is no recognized benchmark interest rate in the money market. Among many short-term interest rates, the interbank offered rate is the most similar to the Federal Reserve rate. Interbank lending rate is a market-oriented interest rate, which has the necessary conditions to become the benchmark interest rate. In the absence of a better choice, we use the 7-day interbank offered rate as the standard to measure the liquidity price. The year-on-year decline of interbank lending rate reflects the loose monetary liquidity in China. The national debt yield to maturity also showed a downward trend, reflecting the change of long-term interest rate to some extent. However, we find that the trend of interbank lending rate is not consistent with the change between M2 growth rate and GDP growth rate. This is because the contents of the two indicators are different. M2 is mainly composed of currency in circulation and bank deposits, which does not reflect the currency held by non-bank financial institutions, but reflects the currency status of circulation and savings. The money market interest rate reflects all the money conditions of financial institutions and the relationship between money supply and demand in investment behavior. The author thinks that the currency liquidity reflected by interest rate has a wider connotation.
(2) Statistical analysis of the correlation between China's capital market and currency liquidity?
The relationship between monetary liquidity and asset prices can be summarized as follows: the increase of liquidity has a wealth effect, and residents' wealth measured by money increases, increasing their purchases of goods and assets; The increase of liquidity has substitution effect, which causes the decrease of short-term interest rate and long-term interest rate and increases the intrinsic value of stock investment. Liquidity is profit-seeking. When the increase of currency liquidity increases the bond price and reduces the bond yield, investors will enter the stock market or real estate market to seek higher returns.
In the statistical verification analysis, we select the Shanghai Composite Index as the index of stock market return, the housing sales price index as the index of real estate return, and the inter-bank bond repurchase rate as the index of fixed income return. The changing trend of money liquidity is measured by the difference between the growth rate of broad money M2 and the real GDP. From the first quarter of 1997 to the third quarter of 2006, we used vector autoregressive method to analyze the above indicators. From the results, we find that there is a weak correlation between the monetary liquidity reflected by Acak AIC and Schwartz SC indicators and the stock index. Granger causality test is an analytical method to analyze whether there is a sequential relationship between indicators. When we use Granger causality test, we find that the monetary liquidity index occurred before government bond index, and the monetary liquidity index has statistical significance in explaining the repurchase rate of government bonds. Monetary liquidity has statistical significance in explaining the change of house prices; Monetary liquidity has no statistical significance in explaining stock returns.
(3) Analysis of statistical results and main conclusions
It is generally believed that the increase of liquidity will raise the price level. First of all, the increase in liquidity has a wealth effect. The wealth of residents in monetary terms has increased. If the supply of consumer goods is satisfied, too much money will flow into the real economy to buy assets and raise the prices of real estate and stock assets. If the price level does not rise, the asset price level may rise sharply. Secondly, the increase of liquidity has a substitution effect, which causes the decline of short-term interest rate and long-term interest rate, thus reducing people's required rate of return on stock assets and increasing the intrinsic value of stock investment. Capital is profit-seeking. When currency liquidity increases, bond prices rise and bond yields fall, excess capital urges investors to seek investment channels with higher returns. In the analysis of historical data, we find that: first, China has abundant liquidity, and the ratio of broad money to GDP is very high compared with other countries; Although the central bank has taken various measures to tighten liquidity, the interbank lending rate has continued to decline in recent years, and the liquidity of short-term interest rates is obvious. Secondly, the statistical analysis results show that the currency liquidity has a significant impact on raising the price of bond assets, and the 7-year national debt yield to maturity, which represents the long-term interest rate, has the same trend as the short-term interest rate. Third, the statistical results reflect the limited significance of liquidity to the stock price.
Summarizing relevant theories and empirical analysis in China, we think that liquidity is the decisive factor to determine bond assets. Monetary liquidity is a necessary condition for the price and rise of stock assets. Because the stock price fluctuates frequently, the statistical results are not significant enough, and there are many and complicated factors that affect the stock changes in China, so it is necessary to apply more mature statistical methods for in-depth research. Since the end of 2005, with the completion of the share-trading reform, the system construction of the stock market has made a breakthrough, investors' confidence has improved, and a large amount of funds brought by abundant liquidity seek investment returns other than bonds. This kind of capital supply provides a strong support for the great achievements of the stock market. Judging from the increase in the number of investors opening accounts, a large amount of funds entering the stock market is undoubtedly the primary supporting force for the stock market to rise. Comprehensive analysis, we believe that other factors need to be considered when analyzing stock assets. It should be noted that this paper studies the general law of liquidity on asset prices. We believe that the prices of bonds and stock assets depend on the matching degree of supply and demand in the short term, and many factors that may affect the relationship between supply and demand should be considered when making specific investment opportunities and product choices. ?
We believe that institutional investors should consider the currency liquidity factor when making asset allocation decisions. At present, international trade, capital flow and changes in monetary policy are important factors affecting China's currency liquidity, which deserve investors' attention. In addition, with the in-depth development of China's capital market, the role of asset prices in the economy will be further enhanced. Therefore, the central bank should consider the asset price factor when making monetary policy decisions.
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