Download Stock Market Development and Economic Growth ： Evidence of China

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Stock Market Development and Economic Growth Evidence of China
DUAN Hongbin
Xinjiang University of Finance and Economics, P. R. China, 830012
[email protected]
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Abstract One of the most enduring debates in economics is whether stock market causes economic
growth or whether it is a consequence of increased economy. The paper, using a data set for the period
1995-2007 and applying the co-integration and causality analysis technology, provides evidence of a
positive and significant causal relationship going from stock market development to economic growth in
long term in China. Moreover, the result indicates that stock market promoted economic growth in
China by mobilizing savings and providing liquidity.
Keywords Stock Market, Economic Growth, Causality Analysis
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1. Introduction
Although as early as 1891, Bohm Bawerk has already pointed out that capital market plays the role in
promoting economics, however, systematic research on relationship between financial market and
economics initiated from 1980s.In particular, the endogenous production of financial theory, the stock
market, the relationship between development and economic growth theory and empirical research into
new energy. Economists began to capital formation, such as stock market efficiency, information
dissemination, risk spreading functions of different perspectives on stock market development and the
relationship between economic growth and give a more in-depth, systematic study and revealed the
stock market on the long-term economic positive impact on growth. In fact, a fully functional, ample
liquidity and the stock market will not only help investors diversify risk, reduce information costs, but
also improve the efficiency of capital allocation and the marginal productivity of capital (Greenwood
and Jovanovic, 1990; Levine, 1991; Pagano, 1993 ; Bencivenga, Smith and Starr, 1996).
From the development of the financial system, the formation conditions of the financial markets is
relatively strict than the financial intermediaries. In the initial stage of economic development, per capita
income and per capita wealth is very low, one can only rely on financial intermediaries reduce
transaction costs. Only when the economy develops to a certain stage, the per capita income and per
capita wealth reaches a certain critical value, people have the ability to organize and participate in
financial markets; financial markets were able to form. As far as the development of China's financial
system is concerned, the establishment and development of Chinese stock market are behind the
financial intermediaries. In fact, the early 20th century, 90 the birth of the stock market was set up in
China's rapid economic development foundation. As China's economy continues to develop, the number
of people capable of participating in the stock market increased, the resulting unit cost to exchange a
significant decrease, which will lead to more economic agents participate in the stock market
transactions, thus contributing to the stock market to higher level. Conversely, as the stock market
continues to develop, its role in promoting economic growth is gradually revealed. For this reason, this
paper empirically tests the intrinsic relationship between the Chinese stock market development and
economic growth by co-integration, Granger causality test and variance decomposition tests.
2. Stock Market and Economic Growth: A Literature Review
With the stock market in the financial system becomes more and more importance, a large number of
economists began empirical testing relationship between stock market development and economic
growth, and made a number of influential results. Atje and Jovanovic (1993) based on 40 countries data
between 1970-1988 hold the OSL regression and results show that stock market liquidity (transaction
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amount / nominal GDP) per capita real GDP on the impact of significant and stock market liquidity have
made every 1% increase in real GDP per capita growth rate of about 0.0851%. Levine and Zervos (1996)
use stock market capitalization rate, the stock market liquidity indicators, stock market trading rates,
turnover, and with the international capital market integration indicators of cross-country study finds
that the stock market mobility and economic growth with the overall development of the stock market
was a significant positive correlation. With two-stage least squares (TSLS) based the 49 countries data
between 1980-1991 Harris (1997) verified that stock market liquidity and the real GDP growth rate.
However, in developed countries, the stock market liquidity does help to explain the real GDP growth
rate. Singh (1997) studied the stock market and the intrinsic relationship between economic
developments, pointed out that the vulnerability of the stock market, stock market and money market
alternative, and the potential threat of the banking system. For most developing countries, the stock
market cannot accelerate the expansion of industrialization and the promotion of long-term economic
growth. Based on the 41 countries data from 1976 to 1993, Levine and Zervos (1998) found that there is
a strong correlation between the overall stock market development and long-term economic growth.
Especially in such as initial income (logarithm of initial per capita GDP), initial education (secondary
school enrollment rate on the initial values), political instability (the number of revolutions and coups),
government consumption expenditure and GDP, rates, inflation and black market exchange rate and
other variables controlled, the stock market development and long-term economic growth is still
significantly correlated. Beck and Levine (Beck and Levine, 2001) using GMM technology in 40
countries between 1976-98, the average panel data regression results show that in the control of the
country-specific effects and potential endogeneity, the stock market and bank liquidity development
independently influence of economic growth. Chang (2001) found that countries with low level of stock
market development, has a positive relationship between stock market development and economic
growth. While those with higher levels of stock market development are not significant. Obviously, most
of the empirical research confirmed that the stock market development has a positive impact on
economic growth.
Recently, many Chinese scholars focused on the relationship between economic growth and stock
market development, most results show that the development of stock market slightly affects on
economic growth. On Ru-yong (1999) pointed out that during the period 1994-1998, China's stock
market development has a little effect of economic growth. Kai-Guo Wang (2000) based on1993-1998
China quarterly data hold the regression and results show that China's stock market liquidity has limited
effect of economic growth. Zheng Huaijiang et al (2000) based on quarterly data between 1993-1998
hold the regression and results show that the improvement of China's stock market liquidity is not to
promote household savings increased and the conversion of savings to investment, and no affect
economic growth. Mu Qing et al (2001) used the Shanghai and Shenzhen Stock Exchange A stock's
capitalization rate, the stock market turnover and stock market trading rate and income volatility in the
stock market development indicators, selected quarterly real GDP growth rate of the chain, investment
in fixed assets of state-owned units quarter of the chain growth rate of bank savings rate and the
residents as an economic growth target for each quarter between 1994-1999 variable data regression,
found that the rate of increase stock market transactions increased the number of fixed assets of
state-owned units, reducing the rate of household bank savings, Therefore, the stock market
development can improve investment efficiency, optimize resource allocation, and thus promote the
improvement of China's economic growth. Based the data of 1994-2001 and quarterly economic growth,
by co-integration analysis, Granger causality test, Zhao Zhenquan (2002) found that there is only a weak
negative correlation between Chinese stock market and capitalization rate, while there is a positive
relationship between trading value and turnover rate of economic growth. Wen Jiandong (2004) by
stepwise regression with 1994-2000 quarterly data found China's stock market can promote economic
growth. The empirical results further show that stock market volatility and between economic growth
and development banks have a significant two-way causal relationship, but correlation is negative,
which indicates stocks may exist "excessive" volatility on economic growth and development and had a
negative impact on banks.
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3. Variables and data collection
A, the economic growth target
Currently, scholars mainly advance two indicators to measure economic growth: First, GDP growth rate;
2 per capita GDP.
B, the stock market development indicators
Generally speaking, the stock market development through market size, liquidity, volatility, measured
three aspects. According to Demirgüc-Kunt and Levine (1996), Levine and Zervos (1998) approach,
taking into account the availability of data, this paper selected four indicators as a measure of the level
of development of Chinese stock market variables.
(1) Stock market capitalization ratio (CAPITALIZATION), equal to Shenzhen and Shanghai stock
market value of the quarter (quarter monthly average) and the ratio of quarterly nominal GDP. This
indicator used to reflect the scale of China's stock market. Although the stock market does not mean that
the greater the higher the efficiency, but generally, the larger the stock market, raise capital and diversify
risk, the stronger the ability.
(2) Stock market trading rate (VALUE), equal to Shenzhen and Shanghai stock market turnover and the
seasonal quarter nominal GDP ratio. This indicator can reflect from the perspective of the total stock
market liquidity.
(3) The stock market turnover (TURNOVER), equal to the quarter in Shenzhen and Shanghai stock
market capitalization and turnover ratio, the indicator of transaction costs from the perspective of the
liquidity of the stock market. In general, high turnover reflects the lower transaction costs, stock market,
or market speculation active.
(4) Stock market volatility (VOLATILITY), in the quarter a day on the Shanghai Composite Stock Price
Index (closing price) on behalf of the standard deviation of volatility. Undeniably, the size of
fluctuations in the level and extent of stock market development there is no necessary connection. But
usually, the "low volatility" or the higher level of development means that the stock market.
C, control variables
Because many factors affect economic growth, this paper selected the following two indicators as
control variables measurement model.
(1) Inflation rate (INFLATION). Taking into account the consumer price index in China has strong
representation, choose Chain Consumer Price Index (previous year = 100) as the inflation measure. Due
to our current consumer price index published monthly, in order to minimize the abnormal price
fluctuations, the consumer price index this quarter to take a monthly average processing.
(2) Indicators of financial intermediary (FI), equivalent to RMB Credit financial institutions of the loans
in the balance with the seasonal end of the quarter the ratio of nominal GDP. Select the index because of
China's financial system is bank-oriented and bank loans play a supportive role in economic growth
significantly. Hence, the indicators as control variables can more accurately reflect the stock market's
role in economic growth.
4. Test and explanation of china's stock market and economic growth
Statistical characteristics of all the variables are shown as Table 1. In order to eliminate seasonal factors
on the time series, this method of using X11 were carried out on all the variables seasonally adjusted.
Table 1: Statistical characteristics of empirical variables
Variable
average
median
maximum
minimum
standard
deviation
GROWTH
9.2000
9.4000
11.5000
7.0000
1.2594
CAPITALIZATION
1.2047
1.1257
2.9798
0.2105
0.6333
VALUE
0.4166
0.3029
2.8708
0.0292
0.4427
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TURNOVER
0.3458
0.2726
1.1275
0.1099
0.2258
VOLATILITY
70.9002
54.8446
291.3983
20.1405
53.0207
4.3003
4.4240
6.1420
2.7089
0.8273
2.9020
1.3002
22.6000
-2.1667
5.1144
FI
INFLATION
Note: The sample number = 50.
(A) Single-integration test
In traditional time series econometric studies, economic data is usually generated by assuming the
process is stable random process. However, many economic indicators of the time series do not actually
have stable process characteristics. Therefore, if non-stationary time series are not addressed by
quantitative analysis, it will often produce the so-called "spurious regression" phenomenon.
As can be seen from Table 2, all sequences are 95% confidence level cannot be a smooth test. Of all
first-order differential treatment variables, and then again unit root test results show that the variable
GROWTH, TURNOVER, and INFLATION in the first-order differential variables through confidence
level of 95% of the stationarity test, other variables may be through the confidence level of 99 % of the
stationarity test.
Table 2: ADF unit root test results
value
threshold
test form
confidence
level
GROWTH
-1.333642
-2.599224
(c,0, 0)
10%
CAPITALIZATION
-1.034562
-2.599925
(c, 0,1)
10%
VALUE
1.253953
-2.599224
(c,0, 0)
10%
TURNOVER
-1.644502
-3.184230
(c, t, 2)
10%
VOLATILITY
-1.261968
-2.599925
(c, 0, 1)
10%
FI
-1.714704
-3.181826
(c, t, 0)
10%
INFLATION
-2.806547
-3.184230
(c, t, 2)
10%
variable
△GROWTH
-6.228486
-3.574446
(c, 0, 0)
1%
△CAPITALIZATION
-2.959957
-2.923780
(c, 0, 0)
5%
△VALUE
-4.883775
-3.574446
(c, 0, 0)
5％
△TURNOVER
-4.991465
-4.165756
(c, t,1)
1%
△VOLATILITY
-12.94308
-3.574446
(c,0, 10)
1%
△FI
-8.802022
-4.161144
(c, t, 0)
1%
△INFLATION
-4.067537
-3.506374
(c, t, 0)
5%
Note: "△" on behalf of the first difference, c on behalf of the constant term, t represents time trend term.
(B) Co-integration test
Examine the variables in the use of Johansen co-integration relationship between the existences of
before, but also to determine the optimal lag VAR model. According to AIC and SC information criteria,
to determine the optimal lag co-integration test period for a. In the financial intermediation and inflation
rate as the control variable conditions, the stock market and economic growth of all variables
standardized between the co-integration equations is as follows:
GROWTH = 0.72CAPITALIZATION-1.38VALUE +3.06 TURNOVER-0.03VOLATILITY
Log likelihood =- 162.9279
The type that China's economic growth and stock market capitalization rate, turnover co-integration
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relationship between the positive, but with the trade rate, market fluctuations, the reverse co-integration.
Measure of stock market development in the four indicators, stock market turnover and transaction rate
co-integration coefficient is relatively large, which indicates that stock market liquidity and economic
growth is strongly correlated; to expand the overall size of the stock market also can play a positive role
in economic growth; stock market volatility co-integration coefficient minimum, indicating that stock
market volatility and the correlation between economic growth and weak.
(C) Granger causality test
From China's financial market development indicators and economic growth causality test results (table
3 below) shows that China's financial market development and economic growth is a certain way
Granger causality, that is, economic growth not only promote financial markets development, but
development of financial markets also push economic growth. Financial market development indicators,
only the ratio of stock market capitalization and turnover of the economic growth Granger causes, and
two variables reflecting the economic growth when the demurrage are more than 15 months. At the
same time, economic growth is the ratio of stock market capitalization and trading rates Granger cause
stock market transactions in which the rate of economic growth to reflect a time lag of 6 months, while
stock market capitalization ratio reflects the time lag 24 months.
Table 3: Granger Causality Test Results
Null hypothesis
F-Stat
probability
Lag
GROWTH does not Granger Cause VALUE
TURNOVER does not Granger Cause GROWTH
3.4192
5.3799
0.0419
0.0010
2
5
CAPITALIZATION does not Granger Cause GROWTH
TURNOVER does not Granger Cause GROWTH
CAPITALIZATION does not Granger Cause GROWTH
TURNOVER does not Granger Cause GROWTH
GROWTH does not Granger Cause CAPITALIZATION
CAPITALIZATION does not Granger Cause GROWTH
TURNOVER does not Granger Cause GROWTH
2.7934
4.3778
2.9446
3.7476
2.0861
2.2963
2.8994
0.0273
0.0026
0.0192
0.0055
0.0765
0.0536
0.0197
6
6
7
7
8
8
8
(D) Variance decomposition analysis
Granger causality test confirmed that China's financial market development and economic growth, there
is some causal link between, but it cannot account for the four indicators of financial market
development on economic growth effects of the relative importance and the importance of the dynamic
characteristics of this basic information. The variance decomposition of economic growth will help to
solve the problem.
Table 4: Variance decomposition table variable GROWTH
Period
S.E.
GROWTH
CAPITALIZATION
VALUE
1
2
0.449930
0.635365
100.0000
98.22910
0.000000
0.319221
0.000000
0.330797
0.000000
0.094777
0.000000
0.638991
3
0.782194
96.22912
0.912419
0.913300
0.289512
0.727697
4
0.917122
93.60291
1.839547
1.718466
0.527636
0.906582
5
1.052201
90.42999
3.147775
2.794617
0.788859
1.128059
6
1.198416
86.52548
4.913558
4.243722
1.060909
1.439308
7
8
1.368592
1.579904
81.68327
75.77592
7.189863
9.959867
6.182906
8.691109
1.336996
1.608578
1.856429
2.386937
9
1.855818
68.91114
13.08863
11.74071
1.863444
3.010897
10
2.227998
61.50511
16.32110
15.15360
2.087507
3.679811
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TURNOVER VOLATILITY
Table 4 shows, indicators of financial market development on economic growth in less short-term
impact, but over time, this effect tends to strengthen. Stock market capitalization rate and the rate of
market transactions, the impact on economic growth was stronger in the market volatility and market
turnover, especially in the 18 months after the capitalization rate and transaction rate on the impact of
economic growth will rapidly increase.
5.
Conclusion
There exists the two-way causality between China's stock market development and economic growth,
that is, economic growth can not only promote the development of the stock market, and stock market
development similarly pushes economic growth. The impact of stock market on economic growth is
more limited in short-term, but significant in long-term. Further, the stock market as the national
economy "barometer" of the function needs to be further strengthened.
Mobilize savings for economic growth in China's stock market is one important way, this equation from
the co-integration ratio of stock market capitalization is associated with economic growth as evident. In
fact, China's sustained economic growth for the stock market is not only a great expansion of the scale,
in turn, the scale of the expansion of the stock market does attract a lot of savings into the stock market,
thereby increasing capital formation.
As the stock market provides the most basic and most important a service, mobility on the growing
influence of China's economic growth is significant. The empirical results show that, China stock market
turnover growth is associated not only with the economy, and of the economic growth of the Granger
reason, it shows that China's stock market has been able to play an important role in information
gathering and corporate governance.
Overall, after 10 years of development, China's stock market has begun to take shape, and the role of the
national economy is increasingly significant. At the same time, and the practical needs of economic and
social development compared to the basis of China's capital market at the present stage of construction
is still relatively weak and largely restricted to healthy market development and its functions effectively.
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