An Empirical Study On The Impacts Of The RMB Counterpart Of Foreign Exchange Reserves On Money Supply In Our Country

The purpose of this writing is to make empirical studies on the impacts of the RMB counterpart of foreign exchange reserves on money supply under the background of the global financial crisis triggered by the U.S. subprime mortgage crisis,then give policy recommendations based on the findings.In the situation of the global financial crisis,trade surplus declines due to decreases in foreign demand, but, China's foreign exchange reserves has not been reduced, the expected appreciation of the RMB has formed a strong attraction to international speculative capital, which has brought great hidden risks to the safe and smooth running of China's economy.Chapter Two analyzes the continuous increases of China's foreign exchange reserves in large-scale,draws a conclusion that the country's compulsory settlement of foreign exchange management system is the leading reason for the growth of the RMB counterpart of foreign exchange reserves. The double-surplus of account current and capital and financial account in China's balance of payments account has formed the scale of China's huge foreign exchange reserves over the years. China's export policy has made the import and export trade surpluses grow year after year.Even during the Asian financial crisis, it was still increasing rather than reducing.Therefore, the import and export trade balance and even the whole huge current account surplus formed over the years is the decisive factor of China's huge foreign exchange reserve.In recent years, China's capital and financial account balance has also started to rise. With the opening of the capital account, China's capital account balance increased significantly,making a great impact on the operation of China's macroeconomic.Chapter Three mainly discusses the impacts of the RMB counterpart of foreign exchange reserves on money supply in China.According to the endogenous money supply theory, increasing foreign exchange counterpart forces base currency released.For many years,the pegged exchange rate system and the mandatory exchange settlement system have formed a huge counterpart of foreign exchange reserves in China.The counterpart of foreign exchange reserves has become the central bank's main asset,as well for releasing base currency. Excessive counterpart of foreign exchange reserves has made a significant expansion of China's money supply,resulting in excess liquidity in China.According to endogenous money supply theory, the total money supply is decided by both base money and the money multiplier, but the counterpart of foreign exchange reserves constitutes a part of the base currency.This paper uses the variables of broad money supply,the RMB counterpart of foreign exchange reserves,legal reserve requirements,the rediscount rate,the prime rate of the current deposit,the one-year prime lending rate and the one-year deposit interest rate of financial institution.Time series data analysis methods is used to make empirical studies on the relation between the RMB counterpart of foreign exchange reserves and the money supply in China through Johansen cointegration test and error correction model,drawing several conclusions:There is a significant long-term equilibrium relationship between the RMB counterpart of foreign exchange reserves and the money supply. Every change of 1 percentage point in the counterpart of foreign exchange reserves will result in a change of 0.55 percentage points in money supply in the same direction;In the short term, the subreport after the error correction shows that the coefficient of the one-period-lagged counterpart of foreign exchange reserves is 0.14,much higher than the coefficients of the other independent variables lagged one period.That is to say,after exerting a short-term effects on the money supply,the short-term fluctuations in the RMB counterpart of foreign exchange reserves is able to close to the equilibrium point from the non-equilibrium point with the fastest correcting speed.Thus, in the short term, the RMB counterpart of foreign exchange reserves is the strongest independent variable which affects the money supplyChapter Four is the analysis and the proposal for the write-off issue of China's counterpart of foreign exchange reserves.In order to prevent the negative impact on China's macro-economy brought by the excess liquidity resulted from the excessive counterpart of foreign exchange reserves,a way should be found to reduce the scale of the it.The first step is to reduce the scale of China's foreign exchange reserves.According to Krugman's "Impossible Triangle Theory",a country can not simultaneously achieve the independence of monetary policy,completely-free capital flows and fixed exchange rate,but can only achieve two of them.As our country must uphold the independence of monetary policy, so if using the way of exchange rate appreciation to curb exports, our country must abandon the free movement of capital, which is contrary to China's current need for opening up capital account gradually,and does not conform to China's economic development policies at the same time.It will not reduce the scale of foreign exchange reserves either, but only slow down the growth rate of foreign exchange reserves.The correct approach is to focus on the use of foreign exchange reserves.In order to prevent the occurrence of the currency crisis,China should focus on how to use foreign exchange reserves to meet the needs of China's domestic construction.Foreign exchange reserves can be used to increase foreign direct investment and purchase strategic resources or equipment and technology which meet the needs of China's construction.It can also be used to give assistance to Latin American and African countries,reducing the foreign exchange reserves while promoting the economic development of our economy and the whole world at the same time.To consider the counterpart of foreign exchange reserves write-off,we should give full play to the central bank open-market operations.Use the central bank notes and repurchase operations to absorb excess liquidity in the market,to controll the money supply and the credit scale,and to maintain the level of domestic nominal interest rates relatively stable in order to reducing international capital inflows to ease the spot market pressure on the RMB appreciation.It is also to form a system of tight credit policy with relatively relaxed interest rate policy and basically stable exchange rate policy,promoting the realization of domestic objectives and the balance of international payments.Allow commercial banks qualified for foreign exchange business to hedge with financial derivatives,to recover the funds with flexible using of swaps and interchanges while giving a reference rate of the RMB appreciation.Then,the anticipation on the appreciation of exchange rate will be stabilized,and the inflow of speculative funds and the continuous increase in the counterpart of foreign exchange reserves will be curbed as a result.