THE IMPACT OF MONETARY POLICY OF US AND CHINESE ON THE SOUTHEAST ASIAN COUNTRIES STOCK MARKET

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Journal of Finance & Accounting Research

INTERNATIONAL ECONOMICS AND FINANCE No. 04 (23) - 2023

THE IMPACT OF MONETARY POLICY OF US AND CHINESE ON THE SOUTHEAST ASIAN COUNTRIES STOCK MARKET

MSc. Nguyen Vu Duy* - MSc. Nguyen Mau Ba Dang* - MSc. Nguyen Thi Bao Ngoc*

Abstract: In terms of GDP growth during the past several years, China and the US have the two largest economies in the world. The stock markets of Southeast Asian nations would therefore experience immediate changes if the monetary policies of the US and China alter. This study focuses on examining the effects of US and Chinese MP on the stock market of Southeast Asian nations, including Thailand, Singapore, and Vietnam, from 2007 through 2022. To better understand the connection between monetary policy and stock market, the estimation of the Garch regression model, PP tests, and ADF are used.

• Keywords: monetary policy, US, China, stock market, Southeast Asian.

* University of Finance and Marketing; email: [email protected] - [email protected] - [email protected] Date of receipt: 28^th July, 2023

Date of delivery revision: 01^st August, 2023

Date of receipt revision: 04^th August, 2023 Date of approval: 08^th August, 2023

Introduction

According to Mishkin (2013), “Monetary policy (MP) is the process of managing money supply by the central bank to achieve certain goals such as controlling inflation, maintaining exchange rate stability, achieving full employment or increasing economic growth”. The US Federal Reserve System (FED) stated that MP is viewed as a mandatory action of economic regulators in order to bring the economy back in line with the initial economic development goals they set out

for the United States. This is done by affecting the money supply and available credit with a variety of control tools. The United States’ MP will serve as a model for many international markets in general and is very relevant to all kinds of commodities, including stocks, dollars, gold, and real estate,…

The FED’s decision will affect the price of various assets, particularly stocks or the stock market in general. These impacts have been researched and quantified by scientists.

China’s MP is unique and has experienced significant shifts recently. The shutdown of China due to Covid in the years 2020-2022, the world’s manufacturing, has led to significant fluctuations in the global economy. The quantity of commodities in the economy, the number of labourers needed to produce them, the ease with which things may be transported internationally, etc., all confront challenges and force the global economy to alter how it runs in order to survive. This is also seen by how the FED and PboC conduct MP differently.

When the FED continues to battle inflation, the PboC finds methods to continue helping the economy’s recovery by maintaining the low interest rate policy. Southeast Asia in particular, as well as emerging or frontier markets like Vietnam, Thailand, and Singapore, would be significantly impacted by this. The unique aspect of the aforementioned markets is that only Singapore’s stock market is designated by FTSE as belonging

Tóm tắt: Xét về tốc độ tăng trưởng GDP trong nhiều năm qua, Trung Quốc và Mỹ là hai nền kinh tế lớn nhất thế giới. Do đó, thị trường chứng khoán của các quốc gia Đông Nam Á sẽ trải qua những thay đổi ngay lập tức nếu chính sách tiền tệ của Hoa Kỳ và Trung Quốc thay đổi. Nghiên cứu này tập trung xem xét tác động của nghị sĩ Hoa Kỳ và Trung Quốc lên thị trường chứng khoán của các quốc gia Đông Nam Á, bao gồm Thái Lan, Singapore và Việt Nam, từ năm 2007 đến năm 2022. Để hiểu rõ hơn về mối liên hệ giữa chính sách tiền tệ và thị trường chứng khoán, ước tính của Mô hình hồi quy Garch, kiểm định PP và ADF được sử dụng.

• Từ khóa: chính sách tiền tệ, Mỹ, Trung Quốc, thị trường chứng khoán, Đông Nam Á.

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Journal of Finance & Accounting Research to the group of nations with established capital

markets, whereas Vietnam and Thailand are categorised as frontier markets (FTSE, 2020).

Regarding the Vietnam stock market, HSBC (2021) stated that the Vietnam stock market (VNIndex) is the marginal market that is interested and favoured when the trading liquidity achieves the greatest level in the study “The numbers behind the growth story” higher than Malaysia and Indonesia, very near to STE. Political stability and the successful management of the Covid-19 outbreak have contributed to the rapid growth of the VNIndex, which will reach more than 1500 points in 2022 with an average trading value of roughly VND 35,000 billion every session. In order to raise money for increasing their company and production, several corporations and banks have taken advantage of the stock market’s growth period by issuing shares and convertible bonds.

Literature review

The transmission mechanism of MP is defined by Mankiw and Taylor (2001) as the procedure by which changes in interest rates or money supply by the MP operator (Central Bank) lead to changes in variables in the economy (market interest rates, asset prices, exchange rates, cash flow, credit supply of banks, private consumption, etc.), with the ultimate goal of achieving economic growth, employment rate, etc.

Five channels via which MP is conveyed, according to a group of NCM (New Consensus Macroeconomics) writers, are the term structure of interest rates, credit, expectations, asset prices, and exchange rates (Kuttner & Mosser, 2002; Mishkin, 1995, 1996). This mechanism essentially explains the links between interest rate, total demand, and price in the transmission of MP.

Mishkin (2001) thinks that the stock market’s movements are impacted by MP and have significant effects on the economy at a more detailed level, which is the spillover mechanism of MP to the stock market channel. Thus, the following factors influence the stock market as a result of the MP’s spreading mechanism: (1) Interest rate;

(2) Investors; (3) Enterprises’ balance sheets; (4) Finance Household Wealth and Expenditures; (5) Household Wealth Effect.

Smirlock and Yawitz (1985) assert that market

interest rates will be used to conduct MP, indirectly altering stock prices through two primary pathways.

First off, because the interest rate utilised in the stock pricing model is equal to how to discount the dividend stream, if the central bank conducts MP indirectly by raising the policy interest rate and the prime interest rate, the market interest rate will also change. Second, changes in expectations for future capital flows, such as corporate earnings, have an impact on the stock market. The interest rate risk premium can also be impacted by MP, including predictions, which will lower stock values. More particular, it is projected that when a restrictive MP is put in place, economic growth expectations will be just as low as inflation. Because of this, a lot of investors would consider equities to be high- risk financial assets and will ask for an even larger discount rate to account for the losses incurred. As a result, the stock price also changes in a negative way.

The money supply M2 and refinancing interest rate were also employed by Tran Thi Xuan Anh and Ngo Thi Hang (2012) to measure MP, whereas the liquidity measurement variable was the average monthly trading volume on HOSE between August 2000 and August 2012. According to the findings of the OLS model, the refinancing interest rate has a negative relationship with liquidity, but the M2 money supply has a positive relationship.

Tran Thi Hai Ly (2015) analyses data from 643 firms listed on HOSE and HNX to conduct research on the period from September 2007 to November 2014 using two MP variables, including money supply growth and interbank interest rates, and four liquidity indicators. The findings demonstrate that unanticipated changes in two MP variables have no appreciable impact on market liquidity.

Improvements in liquidity were also facilitated by rising market returns, inflation, and industrial production growth.

In addiction, Le Dat Chi and Hoang Thi Phuong Thao’s (2016) research also looks at how the global financial crisis of 2008 affected the liquidity of the Vietnamese stock market using a variety of liquidity indicators and numerous data sets. Between the fourth quarter of 2007 and the fourth quarter of 2013, unbalanced tables were gathered from 609 businesses. When compared to the post-crisis period, the GMM technique causes a fall in stock INTERNATIONAL ECONOMICS AND FINANCE No. 04 (23) - 2023

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Journal of Finance & Accounting Research liquidity during the crisis. Additionally, market

factors like capitalization value and profitability ratio have a significant influence on any stock’s liquidity. Leverage, cash flow, and firm profitability are the factors with minimal impact on the liquidity indicator.

Research model and method

The author moves on to develop his research model using the following particular variables from the study goal of analysing the effect of MP of the US and China on the stock markets of Southeast Asian (SA) countries:

Table 1. Description of variables

Symbol Variables Sign exp Measures of Variables Dependent Variables

VNI VN Index Monthly VN Index

FTSE_S Singapore Index Monthly FTSE_S - Straits Times Index

SETI Thailand Index Monthly SETI - Stock Exchange Thailand Index Independent Variables

FFR FED Rate - FED Rate (Monthly)

TBR US Treasury Bill Rate + US Treasury Bill Rate (3 months)

INF US Inflation - US Inflation (monthly) MS US Money Supply 2 + US Money Supply 2 (Monthly)

LR US Lending Rate + US Lending Rate (Monthly) CIR China Interbank

Offered Rate - China Interbank Offered Rate (Monthly)

CTBR China Treasury Bill Rate + China Treasury Bill Rate (Monthly)

CINF China Inflation - China Inflation (Monthly) CMS China Money Supply 2 + China Money Supply 2

(Monthly)

CLR China Lending Rate + China Lending Rate (Monthly) Source: The result of researchers

The following two regression models for time data were created by the authors using the assumptions and the variables listed in Table 1 of the study model:

Model of how US MP has affected several SA nations’ stock markets

𝑰𝑰𝒊𝒊,𝒕𝒕=𝜶𝜶+𝒃𝒃𝟏𝟏×𝑭𝑭𝑭𝑭𝑭𝑭+𝒃𝒃𝟐𝟐×𝑻𝑻𝑻𝑻𝑭𝑭+𝒃𝒃𝟑𝟑×𝑰𝑰𝑰𝑰𝑭𝑭+𝒃𝒃𝟒𝟒×𝑴𝑴𝑴𝑴 + 𝒃𝒃_𝟓𝟓×𝑳𝑳𝑭𝑭+𝜺𝜺_𝒕𝒕

𝝈𝝈_𝒕𝒕^𝟐𝟐=𝝎𝝎+ (𝜶𝜶+𝜸𝜸𝑰𝑰𝒕𝒕−𝟏𝟏)𝜺𝜺_{𝒕𝒕−𝟏𝟏}^𝟐𝟐 + 𝜷𝜷𝝈𝝈_{𝒕𝒕−𝟏𝟏}^𝟐𝟐 𝑊𝑊𝑖𝑖𝑖𝑖ℎ 𝑆𝑆_𝑖𝑖−1=�1 𝑖𝑖𝑓𝑓 𝜀𝜀_𝑖𝑖−1< 0

0 𝑖𝑖𝑓𝑓 𝜀𝜀𝑖𝑖−1 ≥0

In which: I_i,t is the country-specific stock index, which includes stock indices for Thailand (SETI), Vietnam (VNI), and Singapore (FTSE_S). FFR stands for Federal Reserve Interest Rate, TBR for US Three-Month Treasury Bill Rate, INF for US Consumer Price Index Percentage Change, and MS for M2 Money Supply Percentage Change. and the standard US Lending rate is called LR. The estimate parameters are and b_, and the error term is ε_t.

Model of how China MP has affected several SA nations’ stock markets

𝑰𝑰𝒊𝒊,𝒕𝒕=𝜶𝜶+𝒃𝒃𝟏𝟏×𝑪𝑪𝑰𝑰𝑭𝑭+𝒃𝒃𝟐𝟐×𝑪𝑪𝑻𝑻𝑻𝑻𝑭𝑭+𝒃𝒃𝟑𝟑×𝑪𝑪𝑰𝑰𝑰𝑰𝑭𝑭+𝒃𝒃𝟒𝟒×𝑪𝑪𝑴𝑴𝑴𝑴 + 𝒃𝒃_𝟓𝟓×𝑳𝑳𝑭𝑭+𝜺𝜺𝒕𝒕

𝝈𝝈𝒕𝒕𝟐𝟐=𝝎𝝎+ (𝜶𝜶+𝜸𝜸𝑰𝑰𝒕𝒕−𝟏𝟏)𝜺𝜺_{𝒕𝒕−𝟏𝟏}^𝟐𝟐 + 𝜷𝜷𝝈𝝈𝒕𝒕−𝟏𝟏𝟐𝟐

𝑊𝑊𝑖𝑖𝑖𝑖ℎ 𝑆𝑆_𝑖𝑖−1=�1 𝑖𝑖𝑓𝑓 𝜀𝜀𝑖𝑖−1< 0 0 𝑖𝑖𝑓𝑓 𝜀𝜀𝑖𝑖−1 ≥0

In which: I_i,t is the stock index of country i, including stock indexes in Vietnam (VNI), Singapore (FTSE_S), Thailand (SETI). CIR is China’s interbank overnight lending rate, CTBR is China’s 3-month Treasury bill rate, CINF is the percentage change in China’s consumer price index, CMS is the percentage change The change of the M2 money supply and the CLR is China’s prime lending rate. α and b_ are the estimation parameters, ε_t is the error term.

The study’s data was gathered by the authors between January 2007 and July 2022 (monthly data) from the official websites of the Federal Reserve (fred.stlouisfed.org), the country’s central bank, the Bank of England (bankofengland.co.uk), the Bank of France (banque-france.fr), National Data (China), and investing.com for five different countries, including the US, China, Singapore, Thailand, and Vietnam.

Research results

Table 2. Results of the effect analysis of US MP

Coefficients SAIPHAN_VNI FTSE_S SAIPHAN_SETI

CONST (b0) -23.6768 432.11*** 544.6149***

FFR (b1) -49.3479 39.998*** 154.2209**

TBR (b2) 39.2361 9.3131 13.3426

INF (b3) 10.5979 8.7749** -3.2541

MS (b4) -8.3883** -5.1468*** 8.4315

LR (b5) 10.2513 -39.428*** -171.5079***

Note: *, **, *** are corresponding to the levels of significance 10%, 5%, 1%

Source: The result of researchers

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Journal of Finance & Accounting Research The regression results indicate that as FFR

rises, FTSE_S and SETI will also rise. On the other hand, a rise in LR will result in a decline in the aforementioned indicators. Additionally, Singapore’s stock index will fall as the US MS climbs.

Table 3. Results of the effect analysis of China MP

Coefficients SAIPHAN_VNI FTSE_S SAIPHAN_SETI

CONST (b0) 1.5635 333.4083*** 32.0615**

SAIPHAN_CIR (b1) 37.4128 0.9589 -38.5250

CTBR (b2) -0.6207 0.2364 -10.4591

CINF (b3) 10.9780** -2.7276** 1.9233

SAIPHAN_CMS (b4) -0.2227 -1.8837*** -2.2459

CLR (b5) 0.3773 -2.3699 4.8482

Note: *, **, *** are corresponding to the levels of significance 10%, 5%, 1%

Source: The result of researchers

The regression findings indicate that, in contrast to the Singapore stock market, the VNIndex will rise when China’s inflation rises. Additionally, the FTSE_S index decreased as China’s M2 money supply rose. Statistics indicate that China’s MP has little impact on SETI.

Conclusions and policy implications

The author thinks that it is still prudent to focus more on US MP at the moment. Every shift in US MP generates issues for top officials in other nations since the US is a country with a currency that has the potential to control the global economy.

The dollar has influence and exerts pressure on each nation’s exchange rate regime. The whole stock market trembles as a result of every Fed decision, and the US stock market is no different.

In particular, the US stock market and the stock market in Southeast Asia frequently move in lockstep. Trading data demonstrates that the SETI, FTSE_S, and Vietnam stock markets frequently do not reflect as favourably as Wall Street. The strength of other nations’ domestic currencies will weaken due to the dollar’s rise, and as a result, so will the value of their stock markets.

However, the study’s findings indicate that China’s MP also exerts significant pressure on the stock market in the area, in addition to the US’s MP, which has a spillover impact on the stock markets

of Asian nations. It may be claimed that each shock to China’s MP will result in a variety of responses in various nations and time periods.

As a result, central banks of nations whose economies are impacted by the Great Powers’

MP must always develop prompt reaction plans for every possible situation (negative, neutral, or positive).

To make it simple to test adjustments, central banks should decompose their MP goals. By doing this, they may anticipate opportunities and reduce risks for the financial sector, particularly the stock market.

The capacity of the central bank to employ MP instruments to accomplish the goals specified by the government is promoted by an independent central bank, which boosts the efficiency of MP execution.

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