| The concept of liquidity has aroused widespread concern since “The General Theory ofEmployment, Interest and Money”.Since the beginning of the new century, the problem of excessliquidity gradually appeared in our country and China will face the adverse effects of excessliquidity. In this paper, we study excess liquidity formation mechanism under financial repressionand the effects of excess liquidity on inflation based on existing research, the main research andinnovation are as follows:1. From a macro perspective, excess liquidity means the imbalance between the moneydemand and the money supply. The academic community has not formed a unified opinion aboutmeasure of excess liquidity. Quantitative indicators such as money supply and credit aggregatesare more reasonable measures for now. Price indicators such as interest rates, exchange rates andasset prices are more applicable to developed countries. China’s excess liquidity undergoesdeterioration through different manners. In this paper, we select the Marshall K value “M2/GDP”and “total amount of credit/GDP” as excess liquidity metrics.2. The characteristics of China’s economic reform is the economic power decentralizationwhile maintaining the monopoly of state-owned enterprises. China’s market-oriented reform hasmade great achievements because decentralization of economic power, meanwhile, in order tomaintain the monopoly of state-owned enterprises the government had to take the policy offinancial repression. Market distortion means the dislocation of business efficiency and resourceallocation, so the non-market imbalance is actually the root cause of many problems in China’seconomic development. Excess liquidity formation mechanism study should also be from thepoint of view of financial repression, thus this paper theoretically elaborated the formationmechanism of China’s excess liquidity under financial repression, and build a mathematical model.This paper analyzes the formation mechanism of the excess liquidity in China from creditdiscrimination. This is one of the innovations of this article. Mathematical model deductionresults show that higher proportion of state-owned enterprises loans does worsen excess liquidityand more efficient use of enterprise funds can ease excess liquidity. The ownership discriminationfrom state-owned enterprises against non-state-owned enterprises under long-term financialrepression policy lead to dislocation of business efficiency and resource allocation, which resultsin low efficiency of enterprise funds at the micro level, so the government can stimulate theeconomy only through the implementation of expansionary policies and then excess liquiditysituation is deteriorating. 3. We empirically test the model above. First, we test with panel data analysis methods froma provincial perspective empirical, we suggest improvements to estimate the proportion ofstate-owned enterprises loans data, and the empirical results show that the proportion of loans ofstate-owned enterprises has a significant positive impact on the rate of change of excess liquidityindicators through credit expansion. Also, the proportion of state-owned enterprises loans has adirect significant positive impact on the rate of change of the excess liquidity indicators, whichverifies the results of the mathematical derivation. In addition, credit growth has a significantpositive impact of excess liquidity indicators of the rate of change and credit growth will worsenthe situation of excess liquidity, which shows that the efficiency of enterprise funds use efficiencyin China is not high. The panel data results verify the validity of the mathematical mode. Then weempirically test with time series analysis method from the point of view of the national.Combined with panel data analysis we determine the substitution variables because of the absenceof state-owned enterprises the proportion of loans. The empirical results of the time series are thesame with the panel data analysis.4. We study the effects of excess liquidity on the inflation through the phenomenon of the“Chinese Mystery” which means the divergence between excess liquidity and inflation divergencein China. Through inspection of the “Chinese Mystery” phenomenon, we found that differentinflation metrics will make different conclusions and pursuant to which the CPI measure ofinflation is the direct cause of the phenomenon of “Chinese Mystery”. We build a mathematicalmodel to analyze the relationship between excess liquidity and inflation, and the analysis resultsshow that the root causes of the “Chinese Mystery” is that the money diversion effect ofnon-people’s livelihood sector on the people’s livelihood sector. We found that the development ofnon-livelihood sector makes the divergence between excess liquidity and CPI. This is anotherinnovation of this paper. Taking into account the CPI does not contain real estate price, weempirically test the effect of excess liquidity on CPI. The empirical results show that real estatevariables strengthen the explanatory power of excess liquidity to CPI and real estate variables andCPI have significant negative relationship which verifies the currency diversion effect of the realestate market.5. In the future, China must face how to coordinate “growth and inflation”. For this, thispaper presents an innovative point of view. We proved that the liberalization of interest rate andland is the solution to coordinate "growth and inflation" from different perspectives theoretically.And then we advanced the following policy recommendations: continue to promote theliberalization reform of interest rate, allocate the capital elements efficiently, and relieve liquidityexcess by improving the enterprise funds use efficiency; continue to promote the liberalizationreforms of land, and relieve liquidity excess by forming a new growth point and a “currency pool”through land liberalization; implement the “State36”, further widen the entry restrictions and theinvestment channels of non-state-owned enterprises, and ensure the effect of market-orientedreforms. |
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