Offsetting Foreign Exchange Reserves And The Imbalance Of Money Supply In China

Since the reform of China’s exchange rate regime in2005, the RMB nominalexchange rate has continued to appreciate. But the appreciation of the yuan has notrestained the rise of China’s international balance of payments surplus. On thecontrary, the balance of payments surplus is showing further widening. Confrontingthe rising foreign exchange reserves, the central bank take all kinds of sterilizationsmeans to recover the excess base money launched by the channel of the foreignexchange. However, it did not alleviate inflation pressures and the inflation is stillrising, especially the real estate prices soaring. This situation makes the authors tostudy the internal relations between the China’s exchange rate system, internationalpayments, monetary policy and China’s economic development, hoping to find themeasures to solve the problems in our country’s macroeconomic policy and economicdevelopment through the analysis of its internal operation mechanism, so as topromote China’s sustained and rapid economic growth.In this paper, we take quantitative inspection of the base currency of the endogenousMetrology by the methods of cointegration analysis, vector error correction model(the VECM), impulse response analysis method of the base currency and give atheoretical analysis about the return mechanism of the monetary base currency. Theresult of analysis and test shows that the net foreign assets instead of net domesticcredit to become the main factors of influence of base money, the central bank bills toplay the role of recoving the base currency from circulation, the issue of money byforeign exchange channel causing passive currency issue, and the write-off means forkinds of constraints causing China’s monetary base uncontrollable, and the basemoney endogenous having obvious characteristics.The paper gives a static analysis on regional money market equilibrium byestablishing a regional currency market model. On That Basis, we give a comparativeanalysis on the money supply and the money demand between the eastern, central andwestern. The results show that China’s money supply exist regional imbalances. Theeastern part of the deposits and loans and cash delivery exceed the needs ofeconomic development, while the central and western regions of the deposits and loans and cash delivery can not meet the needs of economic development.Basing on an open economic system which carried out the fixed exchange ratemechanism we build a two-region model with different foreign trade openness toanalyze the dynamic balance of the money market under sterilized intervention on theforeign exchange market. The analysis results show that foreign exchange marketintervention under the pegged exchange rate system makes the base currency wasendogen tic in the international balance of payments, the differences of regional tradeopenness lead to the imbalance of base money supply between different regions. It isnot suitable to take overall monetary policy because there is a huge difference ofChina’s inter-regional trade openness."one size fits all" write-off money policy cannot play the role of recoving the base currency effectively and it further tightens thesupply of funds of these regions which are lack of funds in central and western region,which cause the serious imbalance of money supply between the eastern region andMidwestern region.On the basis of the conclusions of the imbalance of China’s regional money supply,the paper take monetary socialist analysis method to study the link between China’sRMB exchange rate, balance of payments surplus, foreign exchange reserves, moneysupply, money demand, insufficient domestic demand and the real estate bubblestudied. The study found that after2002, the RMB exchange rate exist, to some extent,underestimated, which prompting the current account surplus. In the expectation ofRMB appreciation, international capital flows made China’s capital account surplusincreased. For the pursuit of exchange rate stability, the central bank is forced to riseforeign exchange reserves as the continuous expansion of the international balance ofpayments surplus. It has caused too much supply of money in the market, and risedthe risk of inflation. The inflation pressure become bigger and bigger with the centralbank foreign exchange, net foreign assets continuing to rise, the net domestic assetscontinuing to decline, Which deepened of the regional imbalance of the money supply.Declining in net domestic assets resulted in that the money demand of central andwestern regions o are not met, so as to the lack of consumer demand and investmentdemand. As the continued accumulation of net foreign assets, there is too muchmoney in the eastern coastal areas, which ultimately become the formation ofspeculative capital flowing into the real estate market. It caused the real estate bubble.We need to rely on foreign markets for the lack of domestic demand, which further expand the international balance of payments surplus, and then further growth inforeign exchange reserves, and then write-off under increasing pressure, the moneysupply imbalance gradually deepened. All of the processes above format a viciouscycle.The central bank should take regional monetary policy to instead of overall monetarypolicy and promote balanced development of economy.