| Summary: | 碩士 === 國防大學 === 財務管理學系 === 104 === Becoming an economic and military power has been a long-term dream for China, and moreover, its financial market liberalization and internationalization of the RMB have been the most important development strategies and objectives in recent years. In addition, with its economic growth remaining recently, China's national defense force is bond to strengthen and expand continuously. Therefore, China needs a stable financial system and a strong economy to support it. Both the economics and defense development of China, accordingly, have become an issue that multiple scholars from various fields have been craving to explore.
In this study, the co-integration test and Granger causality test were introduced. We examined the relationship between financial markets, economic growth and defense expenditures in China. Using the quarter and annual data from 1994 to 2015, the empirical results are as follows:
(1) China’s stock market, money market and the exchange rate (US dollar to RMB) had a positive impact on its economic growth; the economic growth had a positive impact on the defense expenditures; the stock market had a positive impact on defense expenditures; the relationship between the exchange rate (US dollar to RMB) and defense expenditures is negatively correlated.
(2) In Granger causality analysis, China's stock market had interaction effects on its economic growth and defense expenditures separately. However, the causality goes only one way in the relationship between China's money market and the economic growth, its stock market and the economic growth; which similarly occurs in the relationship between its economic growth and defense expenditures as well as the stock market and defense expenditures.
It is expected that the Chinese government will boost its economic growth by means of restraints on the stock and money market. Also, it is anticipated that the Chinese government is going to adopt U.S. quantitative easing and currency depreciation to promote economic development. In the meanwhile, China is believed to maintain high growth rates of its defense expenditures via the increase of financial capability. Should the RMB depreciate, this situation could be unfavorable to the purchase of military weapons or foreigner technology, thus leading to the decline in military expenditures.
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