International Balance Of Payments And Excess Money Supply In China

With increasing openness of the economy of our country, foreign component accounts for bigger share in our economy, exerting its influence on the domestic economy. Since 2002, consistent"double surplus of international balance of payments"leads to booming foreign reserves and subsequent excess money supply. There also comes ascending price of capital market, appreciation and inflation pressure of RMB. They are believed to be the results of international activities. This dissertation analyzes this issue thoroughly using methods of structure analysis, empirical analysis and normal analysis. We analyze the mechanism how international activities exert its influence on domestic money supply and then estimate the quantity.At first, we analyze the mechanism and channel in which money supply is influenced by international activities. Then, the concrete quantity is estimated by empirical analysis using data from 1996 to 2007. It comprises five parts, analyzing general situation of international balance of payments in recent 10 years, the effect of international balance of payments on the structure and total amount of money supply, the influence of international balance of payments on M2 in short run and long run, excess money supply caused by international activities and the different influence of international activities on money supply under distinctive foreign exchange management systems respectively. After the empirical analysis, it is observed that the trades of goods in current account and FDI in capital account are major components of international balance of payments. These two parts lead to rise of foreign reserves from 2000.The rapid growth of foreign reserves greatly change the structure and amount of basic money supply, making net foreign assets the chief channel of basic money supply. The net foreign assets and domestic credit are proved to be the key factors affecting M2.The effect of net foreign assets seems to be more obvious in the short run. However, domestic credit becomes more significant in the long run. It is estimated that there wasn't excess basic money supply from 2001 to 2003.However, it starts to ascend since 2004.In 2007, the excess basic money supply reaches 650 billons and the accumulative excess basic money supply rise to about 2000 billons. In this logic, the excess M2 is approximately 8700 billions.We then analyze the distinctive influence of three different foreign exchange management systems on money supply, observing that the shocks to money supply caused by international activities won't be relieved by converting to another foreign exchange management system. Conversely, it is discovered that transforming from mandatory settlement system to free foreign exchange management system may enlarge the shock to money supply. We conclude that excess money supply attributes mostly to tremendous surplus of international balance of payments. Therefore, we suggest adjusting the economy itself to solve the problem vertically.At last, suggestions for policies are given, including repressing the wealth effect in capital market and real estate market to prevent consistent inflow of fund and the inflation of the"bubble", exploring ways for foreign exchange to invest in foreign market, improving the derivative market facilitating enterprises and individuals to manage the risk of foreign exchange, developing non-exporting or importing enterprises and industries to enlarge import in trade of goods, developing foreign exchange market, improving exchange rate system and formation mechanism of exchange rate to make exchange rate of RMB back to appropriate level and relieve the pressure for appreciation of RMB.