The High Ratio Of M₂ To GDP: The Low Efficiency Of Capital Allocation A Theoretical Explanation

There are many methods using the same path to research Chinese high Ratio of M2 to GDP: try their best to explain the rapid increment ofChinese M2 to explain the high M2/GDP. Many scholars believe that the high saving ratio is the reason of the rapid increment of the M2, which isalso the reason of the high M2/GDP. The author doesn't doubt these viewsand think that it is the superficial phenomenon. The true reason is the low efficiency of capital allocation. It is the low efficiency of capital allocation that leads to the lack of the valid capital and the continuous distension of the monetary system. It can't make the increasing of the GDP. The articletries to research the M2/GDP according this method setting out from therelationship of the increasing of currency and the increasing of the GDP. The paper analyzes the Chinese efficiency of capital allocation and the formation of the valid capital. At the same time it analyze the mechanism that the low efficiency of capital allocation lead to the increasing of theM2/GDP from the two markets: the credit market and the stock market. Atlast, the paper gives the countermeasure to the high M2/GDP. That is liberalizing the interest rate to improve the efficiency of capital allocation.