Money Supply and Stock Price in China

To explore the clear relation between capital market and money market. We construct the Chinese Shanghai Composite currency and money supply model. The model analysis found that they are serial correlations. The two time series data are first-order non-stationary series. With the two non-stationary sequence, we established the error correction model, found that the currency circulation and the stock price are with cointegrated. When the stock prices in short-term deviate from the long-run equilibrium, the money supply will have a smaller adjustment of -0.036 to the level of stock prices, and the force of money supply will slightly make the stock price back to long time equilibrium.