Dynamic Links among Stock Market Index, Purchasing Managers’ Index, and China’s Foreign Exchange Reserves

Abstract

In post-pandemic China, the expanding weight of services in overall economic activity and the stabilising role of official foreign exchange reserves (FER) elevate the informational value of high-frequency business surveys for interpreting equity market conditions. This study investigates the dynamic relations among China’s stock market index, the Manufacturing and Non-Manufacturing Purchasing Managers’ Index (PMI), and official FER using monthly data from April 2022 to July 2025. All series are log-transformed. Stationarity is assessed via Augmented Dickey-Fuller (ADF) tests to determine that all variables enter the model as first differences. A reduced-form vector autoregression (VAR) with a constant and four lags is estimated, followed by in-system Granger causality tests, orthogonalized impulse-response functions under a Cholesky scheme, and forecast-error variance decomposition (FEVD). Results indicate short-run mean reversion in the stock market index and limited immediate pass-through from manufacturing PMI and FER, while the non-manufacturing PMI exhibits the clearest medium-horizon influence. The FEVD results show that own shocks dominate at very short horizons, with services PMI gaining prominence over 6-12 months and reserves contributing moderately. However, manufacturing PMI accounts for the smallest share of the variance. Granger causality tests suggest that both PMI and FER impact the stock market index, while no causal relationship is found from the stock market index to these variables. These results highlight the role of services-sector signals for monitoring economic trends at medium horizons, with reserves primarily viewed as a stability indicator.