The Studies Of Dynamic Impact Of Money Supply In Twin Surpluses Of The International Balance Of Payments Of China

Since the reform of the RMB exchange rate system in 1994, China has always maintained the current account and capital and financial account twin surplus except 1998 when the capital and financial account kept a small deficit of 6.321 billion dollars. Recent years the scale of the balance of payments twin surplus is increasing. In the first half of 2007, the current account surplus is 162.858 billion dollars, a growth of 78 percent comparing with the same period of its previous year while the capital and financial account surplus is 90.164 billion dollars, a growth of 132 percent.Under the influence of the balance of payments twin surplus, the scale of foreign exchange reserves of China is also consistently expanding, by the end of March 2008, foreign exchange reserves have reached 1682.2 billion dollars. The current account surplus is the dominant one in the twin surplus, and this persisting surplus results from the impact of multiple factors interacting together directly or indirectly such as domestic investment and savings, economic growth at home and abroad, the nominal exchange rate and inflation rate, relative rate of technological progress in trade good sector and non-trade good sector, import and export commodity prices elasticity of supply and demand, the inflow of foreign investment, the Government's trade policy and so on. Generally the higher proportion of the current account surplus in the growth of foreign exchange reserves, the lower possibility of sudden reversal of the balance of payments.China's trade especially the export sector has developed so rapidly, competitive advantage in low-cost is a very important reason, the current account surplus resulting from this export model is at the cost of limited resources and the environment which means the output of a large number of real resources. The heavy dependence upon foreign trade in China is due to the excessive implementation of the strategy of export-oriented and its accompanying policies. The proportion of the total amount of export vs. import in GDP grows from 42.7 percent in 2002 to nearly 70 percent in 2006. The greater a economic growth depends on external demand, the more increasing of economic uncertainty will follow. If things go on like this , it is bound to damage the impetus and potentiality of economic growth which is unfavorable to China's economic health and sustainable development.Capital and financial account of China's balance of international payments includes capital account and financial account two major categories. Its financial account is divided into three sub-items: direct investment, portfolio investment and other investment. The flow of Capital account activities is too little therefore the balance of capital and financial account is mainly constituted by the balance of financial account. The balance of capital and financial account is mainly the combined result of the inflow of foreign capital and foreign investment, in addition to depending on investment income, cost and risk, the inflow and outflow of capital, to a large extent, is subject to a country's capital control policy, and asymmetry of capital controls have a decisive impact on the balance of financial account. Since the mid-1990s in China, the massive inflow of foreign direct investment and the huge surplus of direct investment projects have an inevitable link with internationally-weak competitiveness of Chinese enterprises, assuming ignoring other factors.In addition, the expectation of the RMB exchange rate increasing and its spread between China and the US, the massive inflow of international speculative capital, aggravate capital and financial account surplus in recent years. China's reform and opening–up strategy is successfully embodied in the balance of payments twin surplus for a certain period, the expansion of the scale of foreign exchange reserves also makes international liquidity rising.However, the huge surplus in the balance of international payments brings problems on money supply, inflation as well as pressure of increasing RMB valuation, exchange rate risks becoming difficult to control and so on which are caused by foreign exchange excessive. The level of prices rising too fast and high level of the ratio of investment is the direct result in China's balance of payments twin surplus.From the monetary theory, the internal mechanism that the balance of international payments impact on money supply includes two sides: one is that the situation of the balance of payments directly or indirectly affects the monetary demand, thus affects money supply; the other is that exchange rate systems have an direct impact on the money supply. These two mechanisms are known as"monetary demand mechanism"and"exchange rate supply mechanism."Money supply is a very important variable in a country's macroeconomic and it is the root of the change of domestic price. The influence which the balance of international payments has on money supply may be directly reflected by the fluctuations of the level of price. Its mechanism is: changes in the balance of international payments→change in foreign exchange reserves→change in funds outstanding for foreign exchange→change in base currency→change in the amount of money supply→fluctuations in the level of price. It is an important way to increase a country's money supply that the balance of payments twin surplus resulting from the growth of foreign exchange reserves, in the case of demand unchanged, the fast growth of money supply is inevitable to lead to inflation, which is contrary to the Central Bank's monetary policy objectives. In such situation, it is necessary that the Central Bank must execute intervention, following its study of pros and cons, on foreign exchange market according to its policy objectives.According to China's current foreign exchange management system, the result of the balance of payments twin surplus is that the Central Bank buys a large number of foreign exchange, in recent years, foreign exchange reserves have become the main channel that the Central Bank releases the base money into market. The proportion of the stock of funds outstanding for foreign exchange in the stock of base money is from 49 percent at the end of 2002 to 108.5 percent at the end of 2006, by the end of June 2007, this proportion rises to 125.2 percent. The increasing amount of money supply that was injected by the form of the funds outstanding for foreign exchange will ultimately cause excessive currency in circulation, leading to inflationary pressures. To February 2008 and March 2008, China's consumer price index has risen by 8.7 percent and 8.3 percent. The change of the level of price is consistent with the change of foreign exchange reserve assets which reflects the situation of balance of international payments. The balance of payments twin surplus affects domestic overall economic structure, the form that the excessive injection of base currency depending on the funds outstanding for foreign exchange impairs Central Bank's monetary policy independent, it also makes macro-control of central bank implemented by monetary policy transmission mechanism more complex and difficult.The objective to deal with the balance of international payments is to maintain internal and external balance. Pragmatically, in a near future period, we should attach importance to the balance of payments, adjust trade development strategy mainly including: shifting trade growth mode, enhancing the effectiveness of exports as an export strategy's major point, continuing to develop value-added trade, to achieve the transformation and upgrading of valued-added trade, focusing more on imports, developing trade services, Improving the management of capital and financial account, managing short-term capital flows, making rational use of foreign direct investment; and, on the concept and strategy of attracting foreign capital, the advancing the efficiency of utilizing foreign capital and promoting the national economy and welfare should be set in the first place. Furthermore, for China to realize the balanced development of internal and external economic efficiently it is imperative to encourage Chinese enterprises to go oversea to increase their foreign direct investments, improve formation mechanism of RMB exchange rate, be persistent with tight monetary policy, and be persistent with expanding domestic demand, apply various instruments of monetary policy.