Currency Substitution

Currency substitution in narrow sense(currency substitution for media of exchange) may be none of business to China at present, because the Capital Account is still under control in China, which can keep away large-scale currency substitution from China perfectly. But at the other hand, it is so related to China. Because along with the liberalization of China's Capital Account, once the economic developing speed slows down, Capital Account and Current Account's surpluses reverse to deficits, the appreciation expect of Renminbi will be changed. At the same time, the high quota savings in China's banks will also bring us inflation pressure, inapparent currency substitution may be turn into visible currency substitution. Also, the great deal of Currency substitution inclining may convert into real Currency substitution because of the vulnerable financial system. And the liberalization of Capital Account will make it easier to convert foreign currency's function when it is used as a substitution of Renminbi. That's all the ingredients may cause the Currency substitution.Currency substitution is not just a simple phenomenon of money exchange, it affects a country's macro-economy in many ways. For example, disturb a country's normal financial order, reduce the independence and effectiveness of monetary policy, weaken the government's fiscal basis, make the country's exchange rate fluctuated fiercely, etc. So it is important to learn deeply about the cause,approach and affection of currency substitution, to find the policies and methods to keep it away. It is useful to China's purpose of keeping a balanced development of Macro-economy and a stabilization of China's monetary system. The large-scale currency substitution will also affect the normal process of China's Capital Account liberalization. So it is of great moment for us to discuss currency substitution in China!This article starts with the definition of currency substitution and the...