Berkeley Undergraduate Journal

Despite the rapid development of the Chinese stock market in recent years, relatively little is known about its characteristics or its relationship to other macroeconomic variables. For example, in contrast to more developed markets, dependencies between stock market movements and consumer expenditure are less documented for China. In this paper, I first show that the Shanghai Stock Exchange (SSE, 1999--2010) has higher average returns and variability than the Standard and Poor's 500 Index (S&P 500). The General Autoregressive Conditional Heteroscedasticity (GARCH) model also shows that the SSE has high volatility clustering. Then, I examine the statistical relationships between consumer expenditure and the behavior of the SSE against theoretical predictions. Following the stock market "wealth effect," one would expect higher (lower) stock returns would lead to higher (lower) consumer expenditure. The uncertainty hypothesis predicts that high volatility in the stock market will create higher uncertainty in consumption spending. However, my analyses using the Vector Auto-Regression (VAR) model show that private consumption expenditure in both rural and urban areas had no relationship with and was not aected by the market returns. Analyses also show that the volatility of the Shanghai Stock Exchange had a small lagged eect on urban private consumption expenditure. Results suggest that the Chinese stock market is relatively immature with higher volatility. At this stage, stock markets in China are still inefficient and do not serve as good leading indicators of future economic activities for Chinese consumers.