An Research On The Correlation Between Excess Liquidity Of Bank And Excess Capacity Of Industry

The term of "Excess Liquidity", debuted in "A Dictionary of Economics and Commerce" published by MacDonald & Evans Inc. UK, is explained as "this occurs when banks maintain, voluntarily or otherwise, a greater degree of liquidity than is customarily regarded as necessary according to sound banking principles."As a developing country, we had met with the shortfall of funds and insufficiency of liquidity when it seemed as if the excess liquidity, bewildering developed countries, would never be a problem for us. But recent years of the new century, excess liquidity really meets with us and becomes one of the critical problems of the banking industry and of our economy. Now, it has aroused great interest from all walks of life. Many attempts have been made to analyze the problem from different aspects and to discover the damages it caused, as well as to solve or to relieve the problem. In March, 2007, "Excess Liquidity" was mentioned in the government service report for the first time and was noticed as one of the major issues which must be confronted.The reason why excess liquidity appears is the difference between the rapid growth of deposit and the slow growth of credit which lets banks have large amounts of disposable capital. We can say that loan growth slows down is the determining factor of the problem. Besides stringent form of capital control, bank reform and the influence of the monetary policy of "loose money and tight credit", it is the slowed demand for credit and the banks' reluctance to extend credit because of the excess capacity in industry and the decline in the rate of profit that cause the loan growth slowdown.It looks like that the excess capacity is the external environment of banks and the excess liquidity is the result of internal management of banks. In fact, there is a significant positive correlation between excess liquidity and excess capacity. This paper endeavors to testify the positive correlation and to find some ways to solve the problem of excess liquidity. The contribution of this paper is: firstly, to provide a thorough analysis of the nature of excess liquidity and excess capacity based on domestic and foreign relevant researches and propose a hypothesis of the correlation between excess liquidity and excess capacity; secondly, to collect the data of 29 provinces from 1997 to 2005, and use Panel Data model to verify the hypothesis; thirdly, to analyze the correlation between excess liquidity of bank and excess capacity of industry; finally, to give some suggestions to solve the problems of excess liquidity and excess capacity.