The Empirical Research Of The Influence To Money Supply By Increasing Foreign Exchange Reserve

Since 2000, China's international balance of payments continued to maintain large surpluses. Especially since 2003, China's foreign exchange reserves has rapidly increased. According to statistical data published by State Administration of Foreign Exchange, In the late of 2010, China's foreign exchange reserves reached $2.8 trillion, which are the largest in the world. Many scholars and economists pay close attention to the fast growth of China's foreign exchange reserves.A certain amount of foreign exchange reserves, to some extent, can reflect a country's economic strength, and their increase not only maintain a country's international reputation, but also enhance the national macro-control ability and the ability to resist financial risks, which benefit to the rapid economic development in China. Rapid growth of China's foreign exchange reserves also led to serious inflation and the limit on monetary policy independence.Facing to money flooding, high prices, China's central bank, at first, reduced domestic credit, that is reducing the refinancing of commercial banks, rediscount and selling bonds on open market to recover mobility. However, soon the government bonds were sold out and Central bank was in a awkward situation where no bonds can be sold. In September 2002, China's central bank began issuing central bank bills, and issuing central bank bills had been the main tool on the open market later. However, the issuing central bank bills can not fundamentally solve the problem, the bill will result in the new pressure of money supply. Meanwhile, in order to attract commercial banks to purchase central bank bills, the central bank must raise the nominal interest rate on bank notes. Thus, the cost of issuing central bank bills to recover money is very high. By 2006, the proportion of Central bank bills in debt is more than 30% in the combined balance sheet of People's Bank of China, but China's foreign exchange reserves and money supply are still in the fast growth. In order to withdraw moneys, from 2006, China's central bank frequently raised the deposit reserve ratio. By December 10,2010, the central bank had raised the deposit reserve ratio 28 times in 4 years and seriously affected our economy running smoothly.In order to stabilize exchange rates, China's central bank continued to buy foreign currency in the foreign exchange market, reduce domestic credit and central issuing central bank bills and raise deposit reserve ratio and adopt other means to withdraw mobility. In this paper, it is aimed to explore the relationship between the money supply, foreign exchange reserves, domestic credit and central bank bills on this phenomenon. This article not only theoretical analyzes the various measures of central bank recycle liquidity but also establishes econometric models for empirical analysis, and points out that the money supply mainly comes from foreign exchange reserves, reducing domestic credit and issuing central bank bills have basically no room for operation.This paper is divided into five parts, the first chapter is the introduction part, including the purpose of research article, research significance, research methodology, innovations and literature review of domestic and foreign scholar's research results on this issue. The second chapter is related to introduction of foreign exchange reserves and money supply theory.The part, at first, introduces the concept of the exchange rate, exchange rate system and foreign exchange reserves, then introduces some knowledges of the money supply, including concepts related to money supply, the endogenous of money supply and comparison of gold standard with fiat money system. Finally, with the central bank's balance sheet paper describes mechanism of how foreign exchange reserves affect to money supply. The third chapter describes the current situation of China's foreign exchange reserves, and analyzes reasons of the growth of China's foreign exchange reserves, and explains that the growth of foreign exchange reserves leads to Inflation and dependence of monetary policy, and the monetary policy operation is more difficult. Chapter IV, selecting the date of net domestic credit, foreign exchange reserves, central bank bills and money supply from September 2002-March 2009, makes the Granger causality test and the cointegration test and concludes that China's money supply is almost entirely dominated by the foreign exchange reserves, and issuing central bank bills and reducing domestic credit to control the money supply have failed. Chapter V based on the previous analysis, the end of the text, presents ways on how to reduce the impact on foreign exchange reserves to money supply to maintain the independence of monetary policy. Specific measures include the reform of exchange settlement system, enhancing flexibility of the RMB exchange rate, diversifying foreign exchange reserves, converting foreign exchange reserves from the monetary form to physical form, and so on.The innovation of this paper is to consider the reality that U.S. dollars are used around the world and United States has been levied the seigniorages from other countries and peoples who use dollars. Furthermore, this paper, after merging the balance sheet of People's Bank of China, finds that percentage of net foreign assets in total assets reached and exceeds 100%, while the proportion of net domestic credit tends to 0, and sometimes is negative. On those basis, this paper points out that our national money supply is basically dominated by foreign exchanged reserves.