Research On The Influence Of Growing Foreign Exchange Reserve On Money Supply In China

With the development of economics and the prospection of appreciation of RMB, China has been experiencing a rapid sustained accumulated foreign exchange reserve. Till Mar 2008, foreign exchange reserve of China has already been over 1.68 trillion and became the first in foreign exchange reserve all over the world. Although large foreign exchange reserve reflects that the power of economics has been strengthening continuously, yet at the same time it has a remarkable influence on China's money supply and excess liquidity has filled with the whole macroeconomic and then made it more difficult to carry out monetary policy. The paper tries to investigate the main causes of growing foreign exchange reserve and its influences of money supply and measures to be taken to solve those problems.The paper is divided into five chapters as follows:Chapter 1 will be introduction of the whole paper and gives the purpose of writing the paper, current situation of international research about these problems, methods of research and probable innovation in the paper. Chapter 2 will outline the relationship between the balance of payment, foreign exchange reserve and the amount of money supply in theory. Chapter 3 will discuss the current situation and main sources of foreign exchange reserve accumulation and the effects on economic development in China. The rapid accumulation of foreign exchange reserve is the outcome of macroeconomic conditions and system design. Chapter 4 will deal with the influence on money supply by growing in foreign exchange reserve. First, it analyzes the transmission mechanism that how increases in foreign exchange reserve affects money supply under current foreign exchange management system theoretically. Second, from empirical point, a rise in foreign exchange reserve directly gives rise to the increase in money supply and change the structure of it. Foreign exchange deposit caused by increase in foreign exchange reserve has constituted the main channels of base currency. Finally, continuous increase in excess money supply creates excess liquidity, and then leads to the problem of inflation. Chapter 5 will put forward a couple of suggestion to solve this problem. In order to slow down the influence of foreign exchange reserve on domestic money supply, it will recommend that on the basis of further reform of foreign exchange management system, our government should improve the determination mechanism of RMB exchange rate, strengthen the coincidence between monetary policy and foreign exchange rate policy and try to make a balance of structure in economics and so on.