The Relationship Between China's Foreign Exchange Reserves And Money Supply Growth

China's foreign exchange reserves have been growing rapidly since 2000. Especially since 2007, foreign exchange reserves grow above 400 billion dollars every year. Up to December 2010, China's foreign exchange reserves reached 2.8473 trillion dollars, occupied the first place in the world, and was the first country that foreign exchange reserves surpasses two trillion dollars in the world. Fast growth rate of foreign exchange reserves and its great scale make the financial industry pay attention to it.Scale of foreign exchange reserves reflects a country's economic strength to some extent, and the rapid growth of foreign exchange reserves increases domestic and international confidence in the Chinese economy, which is conducive to China's economic development and enhance Chinese ability to resist financial risks. At the same time, we should also see that rapid growth of foreign exchange reserves has important impact on Chinese money supply and monetary policy. This paper not only discusses the internal mechanism of rapid growth of Chinese foreign exchange reserves impacting on money supply theoretically, but also analyzes the influence of increasing of Chinese foreign exchange reserves impacting on money supply empirically, and puts forward relevant policy recommendations of reducing influence of foreign exchange reserves impacting on money supply. The thesis is divided into five chapters, Chapter 1 introduces the background of this writing and its significance, and gives a summary of related research. Chapter 2 makes some related theoretical explanation, which introduces the concept of foreign exchange reserves and exchange rate system, and its determination on money supply, analyzes the internal mechanism of foreign exchange reserves impacting on money supply. Chapter 3 analyzes the current status of China's foreign exchange reserves and money supply, and elaborates the consequences of foreign exchange reserves impacting on money supply. Chapter 4 gives an empirical analysis of the relationship between China's foreign exchange reserves and money supply growth based on status of China's foreign exchange reserves and money supply since 2000. According to empirical results, we analyze whether the increase of foreign exchange reserves has an impact on money supply, and the extent of impact. Chapter 5 puts forward policy recommendations to reduce the influence of foreign exchange reserves impacting on money supply based on the above analysis.The innovation of this article is taking into account the exchange rate factor when research the relationship between the foreign exchange reserves and money supply. Since the exchange rate reform in July 2005, the exchange rate of the RMB has appreciated about 20 percent that was appreciated from RMB 8.27 to 6.7 yuan to the American one, and still continue to rise. In this case, we have to consider exchange rate factor when research the relationship between the foreign exchange reserves and money supply, but the previous studies basically don't consider the exchange rate factor, so this article researchs the relationship between the foreign exchange reserves and money supply in the case of considering the exchange rate.