Effect of Inflation on Stock Market Returns in China

Purpose: The purpose of this article was to analyze effect of inflation on stock market returns in China. Methodology: This study adopted a desk methodology. A desk study research design is commonly known as secondary data collection. This is basically collecting data from existing resources preferably because of its low cost advantage as compared to a field research. Our current study looked into already published studies and reports as the data was easily accessed through online journals and libraries. Findings: ​The study revealed a positive correlation between inflation and long-term stock returns, suggesting that equities may serve as a hedge against inflation. However, high inflation can increase market volatility, leading to reduced investor confidence and lower stock returns. The relationship between inflation and stock returns in China is complex, influenced by factors such as monetary policy and economic conditions. Unique Contribution to Theory, Practice and Policy: Fisher effect theory, inflation illusion hypothesis & proxy hypothesis may be used to anchor future studies on effect of inflation on stock market returns in China. Financial analysts and portfolio managers should incorporate inflation-adjusted valuation models when assessing stock market performance, ensuring a realistic approach to pricing stocks under inflationary conditions. Central banks should adopt dynamic inflation-targeting policies that ensure price stability while also considering the implications for stock markets and investor confidence.