Divergent Market Efficiency: the Role of GDP, CPI, and Policy Expectations in China’s Equity Market

Yao Wang ()
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Yao Wang: Beijing-Dublin International College, University College Dublin

A chapter in Proceedings of the 2025 5th International Conference on Enterprise Management and Economic Development (ICEMED 2025), 2025, pp 636-646 from Springer

Abstract: Abstract This paper investigates the extent to which China’s equity market reflects macroeconomic fundamentals, specifically GDP growth, inflation (measured by the Consumer Price Index), and policy expectations. Drawing on regression-based analysis across multiple time frames—contemporaneous, lagged, and leading—the results reveal a notable divergence from classical market efficiency. First, China’s stock market exhibits weak contemporaneous sensitivity to GDP and CPI fluctuations, with daily and quarterly returns showing insignificant relationships (R2 = 0.488 and 0.214). In contrast, U.S. equities respond strongly to lagged GDP and inflation, reflecting market efficiency. Second, China’s market demonstrates pronounced anticipatory behavior: forward-looking GDP projections yield high explanatory power (R2 = 0.772), driven by policy expectations and institutional investors. These findings suggest that China’s market exhibits a unique form of selective efficiency, shaped by its institutional structure, investor composition, and the central role of policy in economic decision-making. For policymakers, integrating macroeconomic forecasts with regulatory reforms is critical to enhancing efficiency; for investors, strategies must emphasize policy foresight over-reactive analysis.

Keywords: GDP growth; CPI; Inflation; Stock market volatility; Semi-efficient market (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:spr:advbcp:978-94-6463-811-0_67

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DOI: 10.2991/978-94-6463-811-0_67

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