Monetary policy,asset prices and consumption in China

This paper studies the wealth channel in China. Although the wealth channel has been found to be functioning in many advanced countries, its existence is yet to be explored in most emerging economies, also in China. In order to illuminate dynamics between monetary policy, asset prices and consumption, we use the structural vector autoregression method. The findings support the view that a loosening of China's monetary policy does indeed lead to higher asset prices. Furthermore, a positive shock to residential prices increases household consumption, while the role of stock prices seems to be small from the households’ point of view. Finally, we test the existence of the wealth channel more formally to find out whether those changes in asset prices that are caused by monetary policy are significant enough to increase consumption. In summary, the wealth channel remains weak but there are some signs of it via residential prices. The results are not that different from those attained for the advanced economies, where the size of the wealth channel has been found to be limited.