Excess Liquidity And The Control Of Monetary Policy In China

It’s necessary for one country to supervise the condition of macro liquiditywhether it’s a country with an inflation targeting regime or a traditional country Withmoney supply for intermediary goal,for the condition of macro liquidity can conveyabundant information to monetary authority about the balance of money supply anddemand,or the information of the future price level.In addition,it has importantinfluence to Macro economic and financial stability.Since reformation and opening,the money supply on three different levels hasshown a higher rate of growth in China.but as contrary to the description of quantitytheory of money,the high growth of money has not promoted price and output level torise,it’s called the mystery of China in the international economicsprofession.Especially since Asian financial crisis in1997,as money supply stillremained higher growth rate,consumer price appeared low growth or even negativegrowth.The long and high growth of money supply is inevitably result in excessliquidity.Since2003, the national economy is in a new rise stage of economiccycle.Under the influence of the continuous rapid growth of the national economy andappreciation of the RMB,combined with global loose monetary policy and lowinterest rate environment,China has confronted with tremendous pressure of liquidityflood.Until American subprime mortgage crisis’ breaking out in the second half of2007,the situation of excess liquidity has been reversed.To cope with the internationalfinancial crisis in the second half of2008,monetary control is from tighten tomoderately loose.In2009and2010,the macro liquidity is surplus again in conditionof maintaining loose monetary policy and the quantitative easing policy of the UnitedStates.Excess liquidity have been one of the main challenges to sustainable andhealthy development of macroeconomy,it is a great threaten to the monetary policyformulation and implementation,and so to economic and financial stability.It is notonly helpful to understand the relation between money supply,price and output,but aswell to dissolve the liquidity risk and promote sustained,sound development of thenational economy,if we give a systematic and deep research on excess liquidity.Excess liquidity has drawn concerns from the state and specialists in variousfields,however,it is far from consistency opinion about the cause and criteria of theexcess liquidity,it’s effects on macroeconomy and so on.Liquidity management is an important part of the duties of central bank.For the leading position of macro liquidityin all levels of liquidity,and the limits of research contents and ability,the paperfocuses on macro excess liquidy and it’s effects on the effectiveness of monetarypolicy.First, with reference of concept and measurement methods of excess liquiditythat ECB economists Thorsten Polleit&Dieter Gerdesmeier had suggested,we haveestimated the condition of macro liquidity from1978to2010,and analysised the causeof the excess liquidity by theoretical research and empirical proof.Next,weconcentrated on the effects of excess liquidity to the effectiveness of monetarypolicy,and have evaluated the validity of monetary policy tools in coping with excessliquidity.After summarized the the experiences and lessons of controlling excessliquidity in Germany,Japan and Mexico,we have put forward policy proposal ofdealing with excess liquidity in future.The mainly conclusion as follows:1.There are four obvious stage of macroliquidity,that is primary balance(1978-1994),liquidity relative shortage(1995-1998),relative surplus liquidity(2001-2006),liquidity shortage sharply,graduatelly restoreand surplus again(2007-2010).2.The rapid increase of foreign assets,mainly theforeign exchange reserves caused by trade surplus,is the major factor that bringingabout macro excess liquidity on M1and M2levels in China.3.Excess liquidity promoteoutput and prices to rise mainly through the expansion of bank credit,therefore,whenachieveing output growth targets,reduceing the ability of monetary authorities onprice control at the same time.4.Due to the rapid increase of foreign exchangereserves,except the adjustment of the benchmark lending interest rate have liquiditydrain effect,the effects of other tools is limited.5.When confronted with theimpossible trinity,we should give greater weight to the independence of monetarypolicy;Excess liquidity doesn’t necessarily exert an influence on priceimmediately,it’ll have grave consequences for economy when policy response laggedor too harsh;We should give enough attention to capital market opening,short-termcapital inflow and the ratio of trade deficits to GDP in the process of opening.6. In theperiod of excess liquidity,if cental bank can concentrate on price and output,andemploy various measures to managing and utilizing surplus liquidity,it would helpbetter deal with potential risk of excess liquidity.