Research On The Impact Of Foreign Exchange Reserves On The Monetary Policies In China Under The Open Economy

After joining the WTO in2001, with the rapidly expanding of trade surplus, a largeamount of foreign capital inflows into China, which leads to the imbalance of internationalpayment. The foreign exchange reserve (FER) in China first hit$1trillion in October,2006.In June,2009the number got to$2trillion. In recent years, the FER makes new recordcontinuously.As of the end of2011, China’s FER reached$3.18trillion.Although the FER plays an important part in paying the liquidated deficit, interveningin currency market, maintaining the stability of currency exchange, resisting the financialrisks and so on, the high FER and the quick expansion of reserve level will have negativeeffects on the native economy. Under the condition of open economy, the huge FER willbring many problems, such as generating enormous opportunity cost, causing theinternational “hot money” into the domestic, accelerating the inflation pressure, all ofwhich will affect the homeland independence of monetary policy.Based on the theoretical analysis of FER’s effects on the operation of monetary policy,using the61monthly data from2006to2011about the FER, money supply and the relatedvariables from economy, the author discusses the relationship among FER, sterilization,money supply and monetary policy. It’s found that, the FER has a significant positiverelation with the money supply; besides promoting the economic development, the FERleads to the passive increase of domestic money supply which weakens the regulativeeffect of monetary policy; the open market operations can offset the growth of moneysupply in circulation effectively by monetary contraction, resulting in the alleviation ofdomestic liquidity surplus in short-term. To the efficient management of FER, there shouldbe accompanied by some supporting measures, such as the depth of financial reform, theimprovement of open market operation, the reform of exchange rate system, theacceleration of internationalization of RMB, which will cope with the risks of monetarypolicy from the increasing FER and then improve its independence.