Research on the Interaction between RMB Interest Rate, Exchange Rate Fluctuations and Chinese Capital Market

The interest rate and exchange rate fluctuations have very significant impacts on the domestic economy and capital market development. Adopted from the traditional theory such as the interest rate parity, capital flow theory and the classical theory of IS-LM model, the paper does an in-depth theoretical and empirical research and analysis on the interaction and complex relationship among the three aspects of RMB interest rates, RMB appreciation and securities prices when they change. Research shows that there are strong correlations between Chinese foreign exchange market, money market and stock market; with the RMB appreciation and interest rate increase, the capital accumulation effect and stock assets revaluation effect will promote the overall price level of Chinese Capital market rising. At the same time, in view of the less flexibility in current RMB interest rate and exchange rate, and the reverse impacts between currency appreciation and interest rates, we expect that the effect from RMB appreciation on the capital market will be weakened compared to the past situation of yen appreciation. However, due to the effect that the RMB appreciation is expected to form some international hot money flows, which maybe form a Chinese economic bubble, this trends can not be neglected, it should be did to maintain a high vigilance and to cautiously deal with the relationship between the RMB appreciation and interest rates rise particularly. Key-Words: Currency revaluation, Interest rates, Capital flows