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

In: Proceedings of the 2025 5th International Conference on Enterprise Management and Economic Development (ICEMED 2025)

Author

Listed:
  • Yao Wang

    (Beijing-Dublin International College, University College Dublin)

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.

Suggested Citation

  • Yao Wang, 2025. "Divergent Market Efficiency: the Role of GDP, CPI, and Policy Expectations in China’s Equity Market," Advances in Economics, Business and Management Research, in: Prasad Siba Borah & Norhayati Zakuan & Nazimah Hussin & Azlina Binti Md Yassin (ed.), Proceedings of the 2025 5th International Conference on Enterprise Management and Economic Development (ICEMED 2025), pages 636-646, Springer.
    • Handle: RePEc:spr:advbcp:978-94-6463-811-0_67
    DOI: 10.2991/978-94-6463-811-0_67
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