Intra-national and international spillovers between the real economy and the stock market: The case of China

This paper investigates the existence of mean and volatility spillover effects between the Chinese industrial sector and the domestic stock market (intra-national spillovers) as well as between China's industrial sector and the US stock market (international spillovers). The main result is that real economic activity in China can be influenced by domestic and foreign financial markets. Intra-national spillovers are transferred through the balance sheet channel, while international spillovers are transferred through an indirect channel, linking the domestic industry with the foreign stock market via the domestic stock market. Moreover, it is shown that the dependence of the domestic industrial sector increases during periods of financial instability. In such a case, policy steps are needed to protect the real economy from the unstable financial system.