Empirical Analysis On Progress Of China’s Monetization

The definition of monetization has been mentioned many times, however, there is no wellaccepted definition regard it. Since money system disengaged from gold standard system, theprice of financial assets increased approximately one hundred times. However, this trend reflectsthe nominal terms not the real situation of capital. The process of monetization is to maintaingrowth of global economy gradually by issuing more money.In the aspect of China, monetization index has been grew rapidly, in particular. The figure ofwas only0.3at the beginning of reform and opening up then raised to more than1.8in2010andhave so sign of turning down. Monetary aggregates exceed total output for such a long period oftime never happened in the history of Chinese economic history and is also rare in theinternational business. In the1990s, there were a lot of debates regard China’s high rate ofmonetization issues. Mckinnon (1993) had predicted that if the Chinese government continue torely on loans from national banking system, inflation of eastern Europe type will be inevitable;analysis from the world bank (1996) illustrated that financial surplus accumulated by the savingdeposits from enterprises and residents at the beginning of the reform helped with not onlyachieving rapid economic growth but also avoiding inflation. With the increasing amount ofChina’s currency balance, the high growth and low inflation of economy situation will not be easyto maintain. Nevertheless, the monetization rate of China has no signs of slowing down.Furthermore, there is still no evidence of noticeable inflation. From1997to2006, for almost tenyears, the average of inflation rate approaching to only1%.Apparently,"Chinese mystery"phenomenon proposed by Mckinnon in1993is continuing.While economic monetization rapidly, financial assets in China has experienced rapidexpansion, accompanied by volatility of asset price. Traditional theory suggests that asset pricesincrease caused by the wealth effect, Tobin’s q effect and price expectations effect. However, therising of asset prices consistent with price stability or price decrease are support by more and moreevidences. In recent years, commodity prices are inverse proportion to asset prices which isconflicts with the traditional theory. In summary, in the process of China’s economic developmentshows an obviously complex nature and the relationship between the money supply, inflation andasset prices are blurred. Not only increases the risk of economic operation, but also poseschallenges for monetary policy.This article first analysis on the definition and related theories of monetization based onabove mentioned conclusions, and then carried on empirical tests to verify the progress of monetization in China. It includes three issues as following:(1) anglicize the breadth and depth ofmonetization with theory and empirical test based on monetization of measurement system;(2)include monetize elements into consideration regard progress of economic monetization in Chinaand develop empirical tests on the performance of disequilibrium monetization process as well asits influence about inflation;(3) undertake empirical tests on external factors accelerate andimpede the progress of monetization.Under the help of empirical analysis, conclusions have been made as follows:1. In China, the process of monetary deepening has been moving steadily on. The differenttrend and fluctuation of monetization indexes were the results of portfolio selection. Money oflow levels have strong influences on price while money of high levels have weak influences onprice.The relationship between money and price gradually weaken with the deepening ofmonetization.2. Progress of elements monetization in China absorbed large amount of excess moneydemand. Production factors transaction and financial market trading needs a large amount ofmoney. Moreover, the monetization and financial is a complementary relationship. The growth ofFIR could promote the growth of monetization index. This effect is particularly evident in China,and it is also one of the reasons of high M2GDPindex.3. Structural mutation of China’s monetization process occurred in2008. Productmonetization accelerated dramatically and element monetization decelerated significantly after2008. It means the disequilibrium of monetization process was adjusted, and the position ofmonetary between the real economy and financial market was changed. Thus, the direct effecton price from money supply has been declining gradually.4. Disequilibrium of monetization process had significant effect on inflation. The marketmechanism was not clear and monetary allocation represented significant retardant, so moneycouldn’t have optimal allocation between the real economy and financial market, and this is thereason of disequilibrium of monetization process.5. Exchange rate and its expectations had significant effect on the speed of monetization andthe disequilibrium of monetization process. The undervaluation of the RMB and the expectation ofexchange rate had aggravated the degree of imbalance of current account and capital account,and caused the rapid growth of foreign exchange reserves and money demand, which promotedthe process of monetization. As a result of the uncertainty linkage mechanism among exchangerate, price and asset price, the disequilibrium of monetization process is significant influencedwith the high speed of monetization.6. Financial control is important to the disequilibrium of monetization process. The control of interest rate and exchange rate had twisted the transmission mechanism of monetary policy. Thecontrol of financial deregulation restrained financial function, so financing process is overdepended on banking system. These financial control policy hinder the efficient allocation ofmoney. As a result, the promote the market reform of interest rate and exchange rate and thedevelopment of the financial liberalization is the key to relieve high monetization and thedisequilibrium of monetization process.The biggest difference of this paper from others is that it investigated the process ofmonetization form the disequilibrium of monetization process visual angle. Then the formationmechanism of disequilibrium of monetization process and the influence mechanism ofdisequilibrium of monetization process on inflation was tested. The results of this study haspositive significance on establishing the association mechanism of monetary and inflation andpromoting the management of global liquidity.