The report, which analyzed data from 1993 to the present, found the stock market has become an important transmission channel of the country's monetary policy.

"As a result, the government should establish an effective link between the bank's credit and the stock market," the report said.

The rise in the value of shares suggested holders had more money to invest and incomes were higher, the report stated.

Together with the rise in the value of shares, transactions will also rise.

On the other hand, any rise in the value of shares will encourage holders to invest more heavily in stocks, thus adjusting the structure of their assets.

"The price rise will make the fluidity of money more active," the report said.

Residents and companies are increasingly willing to hold cash or make current account deposits, according to the report.

As a result, M1 and M0, two money supply measurements, will grow rapidly. The fluidity of money, measured by M1/M2 will rise.

The fluidity of money in 2000 was 39.5 percent, an increase of 1.3 percentage points from 1999, the report said.

Theoretically, the changes in monetary policy will affect share prices, with a knock-on impact on investment and consumption, the report said.

But China's stock market is still fledgling and plays a small role in the transmission of monetary policy.

The excessive flow of credit into the stock market - especially the flow of illegal money - will have a negative effect on monetary policy, the report warned.

According to the report, China's stock market was not so sensitive to interest rate changes in comparison to foreign countries. But interest rate changes did have some impact on the market, it said.

China has cut interest rates eight times since 1996.

Residents have begun to invest their savings more heavily on the stock market.

(China Daily August 21, 2002)