The Influence Of Increasing Foreign Exchange Share In Base Money On Money Supply And Research Of The Foreign Exchange Sterilized Intervention Policy

Along with this economic cycle, liquidity excess of Chinese economy has become the most popular topic in the academic circle in 2006. Excessive liquidity results from the rapid growth of foreign exchange reserves because of the continued trade surplus and foreign capital inflow. The central bank need to put out basic currency in the foreign exchange market to buy foreign exchange reserves, which leads to the release of money based on speed. Since the second half of 2002, under the domestic and international factors, China's international balance of payments surplus has intensified badly. Foreign investment in China goes up rapidly, which directly leads to the foreign exchange growing at the annual rate of no less than 200 billion U.S. dollars. In the end of 2006, China's foreign exchange reserves totaled 1.0663 trillion U.S. dollars, increasing 30.22% on the last year. So, trade and capital surplusâ†'dramatic increase in foreign exchange inflowâ†'buying foreign exchange reserves with Yuanâ†'rapid amplification of basic currency, such a chaotic and confusing cycle has become a major issue of the central bank's monetary policy.From the essence, China's international balance of payments surplus is caused by various factors at home and abroad. If there aren't major changes in domestic and foreign conditions, the large surplus in the balance of payments may still be sustained in future. Therefore, the central bank is forced to face the situation of excessive liquidity. Sterilizing excessive liquidity will continue to be an important task for monetary policy. In such conditions, this paper studies the impact of the foreign exchange share in base money on money supply, and explains the necessity for foreign exchange share in base money sterilization. And what is the theoretic basis of foreign exchange sterilized intervention policy? And what is the effect of foreign exchange sterilized intervention policy? In what way should it be carried out? And how to improve our country's foreign exchange sterilized intervention policy? The answer to these questions is just the purpose of this thesis.This thesis consists of 5 parts:The first chapter expounds the emergence and reason of the problem of foreign exchange share in base money. This chapter firstly reviews the history of China's foreign exchange reserves and then analyzes its effects on foreign exchange share in base money. After these analyses, this paper reveals some particularities of the growth of foreign exchange share in base money which include three aspects: 1. Foreign exchange assets were concentrated to central bank excessively, then the proportion between central bank and residents holding foreign exchange assets was imbalance; 2. the position of the base currency put into circulation through foreign exchange channel was too high, which weaken central bank's money control power; 3. The foreign exchange holding was fluctuating with foreign exchange reserves, while the foreign exchange increase continuously. As a result the management of foreign exchange holding was difficulty.Chapter two analyzes the influence of foreign exchange share in base on money supply, which include three aspects: 1.Influece on the base money supply: The growth of foreign exchange reserves changes the structure and the method of base currency supply; 2.Influence on inflation. The increasing in foreign exchange reserves has posed pressure to expected inflation rate. 3. Influence on money supply control. The space has become smaller and smaller for sterilization operation and the stability and independence of monetary policy has been challenged. As a result we can say foreign exchange reserves problem influence the economy of our country obviously. So we must recognize the foreign exchange sterilization policy.Chapter three analyzes the theoretical foundation and options to offset the foreign exchangeshare in base money. First, it introduces the Mundell-Fleming Model to clarify foreign exchange sterilization theoretically. Second, it analyzes primary methods of foreign exchange sterilization policy in detail. The methods can be chosen by central bank are as following: 1. reducing the central bank's re-discount and re-lending to financial institutions. 2. controlling the scale of commercial bank credit 3. controlling the budget deficit and reducing government note issuance; 4 raising the required deposit reserve ratio to reduce monetary multiplier; 5.issuing central bank bills or sell central bank securities in open market. Finally, it explains the effect of foreign exchange sterilized intervention policy. The effect of foreign exchange sterilization policy depends on the efficiency of foreign exchange market. In other words, the effect of sterilization policy is decided by the choice of native residents between domestic portfolio and foreign portfolio. If native residents did not hold foreign portfolio, the exchange sterilization policy of central bank was efficient, vice versa.Chapter four introduces foreign exchange sterilization of china and analyzes its effectiveness. Firstly it introduces the background of Chinese foreign exchange sterilization policy. Second, it analyzes the central bank's sterilization policy on the different stages of development of economy. Then on the base of these analyses, this thesis tests the effect of sterilization policy with empirical studies. And the conclusion is: From the stability of foreign exchange rate perspective, China's sterilization policy is effective. But the growth rate of money supply deviate from the expected money supply growth target frequently, so from this perspective, the effect of China's sterilized intervention policy is unsatisfactory.Chapter five discusses the suggestion to improve our country's exchange sterilization policy. With the accession to the WTO, capital flows more free. And China has implemented foreign exchange rate system reform in 2005, and the foreign exchange rate can be determined by the market. The external environment is changing. So firstly, this part analyzes sustainable use of China's foreign exchange sterilized intervention operations in the future. Then this paper pointed out, in the new economic environment, our foreign exchange sterilized intervention mechanisms and tools needed to be restructured. In the end, this paper gives some suggestion.Objectively speaking, there are a lot of problems that need to be improved in this thesis because of the limit of the writer's research ability. Such as, this paper can not find a precise econometric model to measure the effect of the China's foreign exchange sterilized intervention policy, can not compare the international foreign exchange sterilization operations and can not put forward the best measure of foreign exchange sterilized intervention..