The Causes And Effects Of The Rapid Growth Of China’s Money Supply

Since the reform and opening up, as China’s economic success in transition to amarket economy from a traditional planned economy, the Chinese economy has maderemarkable achievements. In deepening reform and opening up, China has implementedthe investment-driven and export-oriented development strategy, and the national economyto achieve sustained and rapid growth. China has become the world’s second largesteconomy and has the largest foreign exchange reserves. However, while the degree ofmonetization of the economy gradually deepened, the rapid growth of the money supplyhas aroused the concern of the community. This paper analyzes the influencing factors ofthe demand for money in China and the endogeneity of the money supply, combined withmonetary theory of supply and demand, and domestic and foreign scholars’ study.Combined with China’s liquidity position, the paper focuses on the three main reasons forthe rapid growth of the Chinese currency: the monetization process, foreign exchange,short-term capital inflows. The same time, on the basis of the quantity of money equation,we derive the dynamic growth path of M₂/GDP and then use the1980-2012statistics to anempirical test. The results showed that the growth curve of the M₂/GDP is Logistic curve,that first accelerated and then decelerating rise, and finally tends to an upper limit.Themodel’s the nonlinear least squares estimation shows that M₂/GDP accelerated rise before1993and deceleration rise after1993, the upper limit is2.03. Finally, the paper analyzesthe impact of high-speed monetary growth on inflation, foreign exchange reserves,monetary policy, and the RMB exchange rate, and put forward policy recommendations.