A Study On The Impact Of RMB Issuance Methods On The Inflation In China

Since the unification of exchange rates in 1994,China's international balance of payment has been characterized by a surplus situation,due to a rigid exchange rate formation mechanism.Under the exchange settlement mechanism,the people's bank of China needed to purchase a huge amount of foreign exchange assets,while put in homologous amount of RMB as foreign exchange.Thus,purchasing foreign exchange became the main method for RMB issuance.Foreign exchange increased greatly year by year,and according to the statistics of the Chinese central bank,by the end of 2014,China's financial institutions had a total amount of 27.07 trillion yuan as foreign exchange,while the figure was only 1.43 trillion by the end of 2000,increasing about 20 times during the years.As China's foreign exchange had long been in an uptrend channel,China still had to issue excessive RMB,with foreign exchange as mortgage,thus the risk of inflation continued to exist.With economic slowdown during the past two years,the approach of issuing RMB by purchasing foreign exchange began to limit government's choice of policies,as economic recession needed to be alleviated by more supply of RMB.However,the supply may not increase,and may even be reduced,with the surplus in international balance reduced or even turning into a deficit.Therefore,to avoid large-scale economic fluctuation and alleviate the difficulties of macro control,it is necessary to carry out an in-depth research on the approaches of RMB issuance,detecting and correcting problems with them,so that they would not drive continuous economic growth,lead to profound economic adjustment or limit the government's macro control.This essay starts discussion from the issuing organs,source of RMB.First,it gives a brief introduction to approaches of RMB issuance,including their revolution,current status,theoretical basis and relevant systems.Then,it introduces how currencies in developed countries and regions are issued,including USD,NTD and HKD.This part introduces the basic operation,main theories,related systems and operating mechanisms of these currencies,with comparisons made on the issuance approaches between them and RMB,so as to lay the foundation for the theoretical analysis followed.Next,the essay makes a logical analysis of the laws of how approaches of RMB issuance influences inflation,makes an empirical study on how the approaches influence China's trend of inflation through currency and exchange rate,so as to find problems with approaches of RMB issuance.Lastly,based on China's current economic and financial circumstance,this essay puts forward some reform goals of the approaches that are suitable for China's national situation.Besides,it designs the path and steps of the transformation of the approaches as well as chooses a suitable time for the transformation.The following conclusions are reached in the empirical research on the influence of RMB issuing approaches on inflation.First,issuing RMB by purchasing foreign exchange may lead to excessive issuance of RMB for the following reasons.First,this approach of RMB issuance will lead to the long-term existing of surplus in international balance;second,this approach will lead to the increase of cost of exports and in turn the increase of RMB issuance;then,this approach will not weaken money multiplier;lastly,this approach will make the authorities urging the central bank to issue more RMB.Second,issuing RMB by purchasing foreign exchange may lead to the abnormal change of exchange rate.Surplus in international balance premised by this approach may not necessarily bring up the exchange rate of RMB,and deficit in international balance may not necessarily bring down the rate.The change of exchange rate of RMB goes against laws described by classical theories,i.e.the abnormal change of exchange rate.Third,influence on inflation by RMB exchange rate should be analyzed in different phases.Appreciation of RMB may bring up inflation rate in early stages,but later may bring down the inflation rate.On the contrary,depreciation of RMB may bring down he inflation rate in early stages,but later may exacerbate inflation.In later stages,surplus in international balance may simultaneously increase foreign exchange and money supply,and more money supply will inevitably lead to more serious inflation.In addition,this is also evidenced by the response curve of accumulated pulse,as increased foreign exchange may trigger inflation,and the more enduring the influence,the more effect it may have.Fourth,approaches of RMB issuance affect inflation through such a monetary channel: “foreign exchange—volume of money issuance—money supply—inflation”.The increase of foreign exchange may increase the volume of money issuance through money issuance channel,and in turn bring up commodity prices.The influence of foreign exchange on inflation is hard to remove,even when various monetary policies are adopted by the central bank.Currently,China's main monetary issuance function is undertaken by foreign exchange,which directly combines foreign exchange with volume of money issuance.This is an important cause for increased inflation.Fifth,approaches of RMB issuance affect inflation through such a channel of exchange rate: “foreign exchange—volume of money issuance—nominal exchange rate of RMB—inflation”.Under the mechanism of issuing RMB by purchasing foreign exchange,when foreign exchange increase,more RMB will be needed for foreign exchange.Besides,Chinese central bank has established the mechanism for exchange settlement,so more RMB needed for foreign exchange may lead to more RMB supply,and exchange rate of RMB brought up by increased demand will again be brought down.Thus,it is difficult for the exchange rate of RMB to timely appreciate to appropriate value.In this situation,inflation may be restrained in the short run,but in the long run,it may exacerbate inflation.