Analysis Of The Affecting Of Foreign Exchange Reserves To Money Supply In China

Under the background of pegged exchange rate and imperfect sterilized intervention, the significant accumulation of China's foreign exchange reserves have further enhanced the endogenous money supply. Based on the system analysis of the reasons for significant increase in foreign exchange reserves, the paper provided corresponding short-and long-term policy proposals, also tried to resolve the impact of China's foreign exchange reserves to money supply problems.Foreign exchange reserves as the central bank's foreign debts and the RMB were in match in the central bank's balance sheet. In the floating exchange rate system, the central bank did not promise on the exchange rate, which intervened foreign exchange market was to maintain the foreign exchange demand balance. The number of the running local currency and foreign currency was very limited. Foreign exchange reserves and money supply did not establish direct channel. In pegged exchange rate system, the central bank had the dual mandate of keeping stability of exchange rate and money supply. There were always between the two conflicts. In order to alleviate contradictions, People's Bank of China comprehensively utilized control means that included the issuing central bank bills raising the reserve ratio, the loan window guidance, to recovery foreign exchange. Compulsory buying-selling exchange mechanism further pushed the contradiction between stability of exchange rate system and money supply. From 2000 to 2007, China's money supply kept an annual increase rate of 15.9%, which made macroeconomic out of the deflation since 1998.Economy overheated in some areas from 2003.