This article examines the long run relationship between M2-to-GDP ratio, the indictor of excess liquidity, and asset prices for China through cointegration estimation procedure. It also implements the Vector Error Correction Models (VECM) to explore simultaneously the short- and long-run causation in the modeling process. Results from the cointegration tests reveal that excess liquidity, asset prices, and the growth rate of household deposit share long run equilibrium relationship, while the results from the VECM indicate the absence of short run causality between excess liquidity and asset prices, but in the long run asset price and the growth rate of household deposit have casual influence on excess liquidity. In addition, the study finds that there is unidirectional causality from the growth rate of household deposit to the stock price in the short run but not vice versa.
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