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LIST OF FIGURE 
Figure 
1. The trend of R, MRSH, MRSZ and 
inflation 
rate 
45 
2. The trend of R, MRSH, MRSZ and exchange rate
47 
3. The trend of R, MRSH, MRSZ and money supply 
49 
4. The trend of R, MRSH, MRSZ and interest rate
 
 
 
51 

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CHAPTER 1 
 
Introduction 
 
 
1.1 Background 
In recent years, China banking industry is development and innovation on and 
on, the whole banking industry have taken place a historic changes, played an 
important role in supporting and promoting the economic and social development, 
strongly support to the China's national economy development. At present there are 
16 Banks in the a-share listed, the banking sector as one of the most important part in 
the Shanghai index, the tendency will make a significant influence to the market. 
There are many of factors that are important in determining the return of stock. It is 
generally believed that systematic economic and financial news will give impact on 
the stock returns and the stock returns were be affected directly or indirectly by a 
number of different economic factors and those factors could predict a notable portion 
of stock returns. (Lim, Tang and Yu, 2012). 
Many studies have researched about how macro-economic factors, such as 
interest rate, exchange rate and money supply influence to stock prices. For example, 
some people studied the impact of individual factors such as real activity and 
inflation, interest rate on stock prices. And some examined the relationship between 
stock prices and a wider financial variety and macro-economic variables. (Liu and 
Shrestha, 2008). 
The Chinese stock market is very different from other, especially according to 
the extent of government regulations and investor composition. The development of 
Chinese stock market is a milestone in china’s economic reform process. From 1990 
to 1991, China set up two stock exchange markets, Shanghai stock exchange and 
Shenzhen stock exchange. There are five shares in Chinese stock market: A-shares, 
B-shares, C-shares, H-shares and N-shares. 

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These two stock markets have been growing fast over time. After China join to 
the WTO, the Chinese stock market became more and more concerning by the global 
investors. And it also plays a more important role in the world economy. (Seddighi 
and Nian,2004). So Chinese stock market has be an attracting market that can attract 
both foreign investors and local investors to invest. 
Macro-economic variables always seem as the important sources of stock 
market volatility, therefore, these variables role as the leading indicators of stock 
returns. Binder and Merges (2001) do the research about the volatility of the return on 
the market portfolio is related to the ratio of expected profits and expected revenues 
for the economic. Nardari and Scruggs (2005) point out that future return is a high 
uncertainty factor that is mainly associated with economic goes down. In literature, 
there are numbers of documents discuss this impact of macro-economic variables on 
stock returns. 
Nowadays, banking sector plays a very important role in the economic 
development and is a very important part in financial system of a country. So a 
suitable and effective banking system would create a healthy economy. So how can 
we know that the banking system is effective or not, bank stock would be one of 
factors that can reflect the affection of banking system. 
Besides of these studies which are all related in the developed countries, it also 
have some studies analyzed the impact of different kinds of macro-economic 
variables on stock market in emerging market. But less to study give more details the 
impact of macro-economic factors on some sectors in the stock market and less 
empirical studies have yet been published that examine the joint interaction of interest 
rate, inflation rate, exchange rate and money supply on banking industry stock return. 
Not much is known about the Chinese stock market behavior. Moreover, some 
of investors who with little investment knowledge or experience, they only are 
speculators. Stocks buy and sell on historical price trends or on markets rumor, the 
last lead to stock market mania (Liu and Shrestha, 2008). But now, most of investors 
have a great interest in searching for variables that can help them to analyze and 

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forecast stock prices. They also focus on macroeconomic news that can help them to 
analyze the trend of stock prices, so that can increase the returns and reduce the 
investment risk. So this study can be a document which offers this kind of knowledge.