On The Issue Of China's Currency Alternative

Typical of monetary fluctuation of an open economy is the Currency Substitution. In economics the term Currency Substitution means when there are no restrictions imposed on the inflow and outflow of capital, a foreign currency may substitute the domestic currency's functions to a certain extent to act as a medium of exchange, as a medium of payment, as a measurement of value, and as a store of value. In open economy, Currency Substitution will lead to a country's macroeconomic fluctuation. For example: the effectiveness and the independence of the government's monetary policy will be affected negatively, the basis of the government's tax collection will be weakened, the exchange rate of the domestic currency will fluctuate frequently, the balance of payment of the country will result in deficit and what is more, the process to make the domestic currency a convertible currency will be slowed down. Since the 1970s, most of the countries in Latin America and former Soviet Union and eastern Europe have experienced a kind of Currency Substitution which is called Dollarization. Dollarization means that the U.S Dollar has substitute the domestic currency to a certain degree in the functional areas of currency as a medium of exchange, as a medium of payment, as a store of value, and as a measurement of value. It has negative influence on the related countries?macroeconomic development, and the effectiveness of the traditional economic policy has been challenged greatly. So to learn to know the cause of the Substitution, the impact of the Substitution, and the key to the Substitution is very important, not only for maintaining a country's monetary systematical stabilization, but also for maintaining the equilibrium of an open economy. It is clear that Currency Substitution will only occur when there are no restrictions imposed on the inflow and oufflow of capital. Since China has many restrictions on it, the Chinese Currency Substitution must be minor. Although there is great need of foreign currency in China, foreign currency can only act as a store of value, and has not taken the place of the Chinese currency to act as a medium of exchange, a medium of payment, etc. It has been demonstrated that the F I M2 ratio is not very high compared with the Latin American countries and the former Soviet Union and Eastern European countries. Although the Currency Substitution in China is not serious, it does not imply that China will not face serious Currency Substitution problem in the process the make the domestic currency a fully convertible currency. As a fast growing developing country, Chinese economic reform was widely considered to be a great success. Even though, we must realize that our economic development is far behind from that of the developed countries or even the newly industrialized economies. So in the years that followed, we will continue to be threatened by the serious issue that foreign currency may substitute our currency. Since the liberation in 1949, central planning system has played a major role in China, which means most of the key decisions are made centrally by the government and long term goals are given structured by a series of five-year plans, which in turn are implemented by highly detailed one year plan. Up to now, we are still in the process to convert from highly central planning system to free market system. The adjustment of the economic structure, the establishment of the market system, the perfection of the policies will need more time. During the period, there might be some conflicts and contradictions with...