Research On Central Bank Controlling The Liquidity In Commercial Banks

Since 2005, the excess liquidity on Chinese commercial banks has been getting more and more serious. Our country's foreign exchange reserves continued to accelerative growth. By the end of 2008, it has reached 1946.03 billion U.S. dollars, which was more than 3 times of the end of 2004. The increasing foreign exchange reserves have poured more excess liquidity into bank system. In addition, the balance of banks has become worse and worse. Commercial bank's excess liquidity issue became the focus of the society. The excess liquidity is harmful to the Chinese commercial banks and the Chinese economy itself. While weakening the profit-making ability, excess liquidity also has impacts on financial resource allocation and the monetary policy conduction of the nation. To solve this issue, we use deposit reserve policy. From July 2006 to June 2008, the statutory deposit reserve ratio has been raised 19 times, at the end of June 2008, it reached 17.5%. Although the central bank uses deposit reserve policy frequently, it didn't achieve the expect results, through the analyzing of economic variables such as M2, the balance of deposit and loan, and money market interest rates. This made the use of monetary policy into predicament. This is mainly because our country's monetary policy instrument selection has limitations, and economic systems, financial systems have a negative impact to implementation of monetary policy. The central bank raise the statutory deposit reserve ratio to reduce liquidity, while China's economic policy makes a substantial increase in foreign exchange reserves and pour liquidity into the banking system. The foreign central bank has already use open marketing operation instead of deposit reserve policy. Our central bank should learn to foreign central bank. We should develop our money market to make the policy more practical significance and give up the deposit reserve policy gradually. And also, economic and financial systems coordinate the implementation of monetary policy, from these, we can solve the issue better.