Currency Substitution, Anti-currency Substitution

After the financial crisis, people pay more attention to the issue of RMBinternationalization, and China begins to think the issue of RMB internationalization fromthe national strategic perspective, and also takes a series of positive actions to acceleratethe process of RMB internationalization. However, RMB internationalization is not merelya course of currency exchange and the change of flow conditions, but a comprehensivereform of economic and financial fields. During the course of RMB internationalization, itwill lead to huge economic and financial risks if any link does not match, such as risk ofcapital flow, risk of independence of monetary policy, especially, the risks of currencysubstitution and anti-currency substitution, it will lead to the reversal of the process ofRMB internationalization easily, so we must pay more attention to it and take actions toprevent it.The paper includes five parts. First part, namely, chapter one, is the induction; thesecond part is the theoretical research, including chapter two, chapter three, chapter four;the third part is the empirical research, including chapter five, chapter six; the forth part isthe countmeasures, including chapter seven, chapter eight; the last part is conclusion.Chapter One: induction. It introducts the background and significance, the status quoof domestic and foreign research, ideas, content and method, the innovation andinsufficiency of the paper.Chapter Two: concepts defined. Mainly for currency substitution, anti-currencysubstitution and currency competition. The paper argues that the replacement or conversionof currencies is two-way, not only the phenomenon of currency substitution, but also thephenomenon of anti-currency substitution in a certain context. In essence, they are theresults of currency competition. Chapter Three: Mechanism of currency substitutionâ… : the mainstream theories. Itincludes the mechanisms of formation and preventation of risk. The mechanisms offormation of currency substitution include production function theory of money service,marginal utility theory of money demand, portfolio theory of money demand andprevention theory of money demand. The major features of mechanisms of formation arethat they draw their currency demand functions through a combination of variousassumptions and facts, and thus to clarify the mechanism of currency substitution, and alsodo some empirical tests which confirm the existence of phenomenon of currencysubstitution through their respective money demand function. However, these theories arederived under certain assumptions, and there are some limitations, different countries needto combine their specific analysis. The major features of mechanisms of preventation ofrisk are that currency substitution and anti-currency substitution have their own features,the major countermeasures to prevent the risks of currency substitution and anti-currencysubstitution are to make their own gains less than their own costs, and then rational personswill lose the motive to carry out currency substitution and anti-currency substitution.Chapter Four: mechanism of currency substitutionâ…¡: economic impact. This chapteranalyzes the effects of currency substitution on exchange rate, monetary policy,seigniorage and inflation tax and Balance of Payment. This paper argues currencysubstitution is a monetary disturbance of open economy; and it has its rationality in acertain degree, reflecting the diverse needs of the residents for money, while the highdegree of currency substitution will have severe impacts on a country's economy.Chapter Five: international study of the phenomenon of currency substitution andchina's measure. This chapter mainly analyzes the phenomenon of currency substitution ofLatin American countries, countries in transition, developed countries and China. Thispaper argues China's degree of currency substitution is in the lower level, especially since2001, it was a gradual weakening trend, getting lower and lower, which shows China isfacing is not the phenomenon of currency substitution, but the opposite phenomenon,namely, anti-currency substitution that RMB is replacing the dollar.Chapter Six: china's specific study and its empirical on anti-currency substitution.This chapter first studies anti-currency substitution from foreign currency deposits ofcompanies and family, position for forex purchase of central bank, buying and sellingforeign exchange for the customer and the surrounding of RMB; Then this chapter analyzes the impact factors and its empirical research of anti-currency substitution; In theend, the chapter analyzes economic effects of anti-currency substitution. This paper arguesChina's current anti-currency substitution, on the one hand, indicates the stability of theRMB exchange rate, and China's rapid economic growth makes China no the possibility ofcurrency substitution, and this phenomenon is good for China. On the other hand, it alsohas some negative effects on China, for example, it will lead to some impacts on China'scurrent exchange rate regime, impede the independence of monetary policy and affect theeffectiveness of monetary policy. So we must maximize the interests of RMBinternationalization by utilizing positive facts of promoting the RMB internationalization,and preventing the negative effects of anti-currency substitution.Chapter Seven: research of gains and risks of RMB internationalization. First, thischapter studies theoretical reviews of RMB internationalization; then, this chapter analyzesthe gains of RMB internationalization; in the end, this chapter analyzes the risks of RMBinternationalization, focusing on the analysis of the mechanism that RMBinternationalization leads to currency substitution and anti-currency substitution. Thispaper argues that, for RMB internationalization, the key point is not whether we shouldpromote RMB internationalization, but how we take appropriate policy measures to reduceor weaken the motives of currency substitution or anti-currency substitution, or it will leadto the upheaval of domestic economic and financial situation due to the deterioration ofsituation of currency substitution or anti-currency substitution.Chapter Eight: policy suggestions of the risk of currency substitution or anti-currencysubstitution during the course of RMB internationalization. Based on the theory of inactionband, this chapter puts forward policy suggestions of the risk of currency substitution oranti-currency substitution during the course of RMB internationalization. Such as thestability and rapid development of macro economy, gradual advance of capital accountliberalization, flexibility of exchange rate regime, reform of the RMB interest rate, stabilityof price level and the establishment of cross-border capital flow monitoring system, etc.,keeping in mind the coordination and cooperation of policy suggestions in order to preventaccording risks.The last is conclusions. It summarizes the major point of the full papert.The paper puts forward some innovative ideas:First, currency substitution or anti-currency substitution, the two forms of substitutions in the open economy are all likely to occur, and their interactions will producemore complex economic effects and it is difficult to control. Therefore, in the process ofRMB internationalization, it is very portent that we take sufferent acktions to prevent therisk of currency substitution and anti-currency substitution.Second, that China is facing is not the phenomenon of currency substitution, but theopposite phenomenon, namely, anti-currency substitution that RMB is replacing the dollar.The paper pays more attention to anti-currency substitution, and analyaes its specificperformances, economic effects and empirical research.Third, this paper thinks RMB internationalization will bring enormous gains and alsoproduce a wide range of risks. The paper focuses on the analysis of the mechanism thatRMB internationalization leads to currency substitution and anti-currency substitution.Fourth, based on the inaction band theory, the paper puts forward some policysuggestions to prevent the risk of currency substitution and anti-currency substitution frommulti-angles, and stresses we should pay more attention to the coordination andcooperation of policy suggestions in order to prevent according risks.