Research On Chinese Currency Substitution

Since joined the World Trade Organization in2001, China’s economy has become increasingly open. In recent years, China has made some reform progress in the interest rate liberalization and the mark formed exchange rate regime. Including the introduction of the floating exchange rate system, the abolition of compulsory foreign exchange settlement and sale system, allow commercial bank’s deposit and loan interest rates floating within a certain range. After the subprime crisis, The international community’s requirement for the reform of the existing international monetary system are growing louder, and the internationalization of the RMB has been mentioned many times. We can see a trend that the control of China’s capital account is bound to be relaxed. Under the open economy, if the current account and capital account is convertibility, there will be the risk of currency substitution in china.Currency substitution occurs will have some negative effects on China’s economy. First of all, currency substitution will affect the independence of monetary policy of the Central Bank of China, reducing the effectiveness of monetary policy; secondly, currency substitution will influence China’s fiscal policy, weaken the government’s collect ability of Seigniorage and inflation tax, weaken the financing ability of department of finance; thirdly, the currency substitution will make RMB’s exchange rate instable and broaden the RMB’s exchange rate’s fluctuation range. finally, the emergence of currency substitution will bring some negative impacts on China’s international balance of payments especially have some negative impacts on the capital and financial account. if the currency-substitution’s degree rise, and the government relaxed the control of the capital and financial account’s short-term project, there may even be cause a capital flight phenomenon, it’s unfavorable to national economy.Based on asset portfolio theory which based on currency-substitution, and join with the transaction money demand, the analysis finally made this conclusion:the level of income, the inflation level, the currency-assets’rates of return, foreign trade scale and the stability of exchange rate level are directly determinants of currency-substitution’s degree.In the empirical test,this article joined the currency-substitution’s five affect factors to analysis the currency substitution of China. And the analysis conclusion is:during the period of2005to2012, china’s GDP,foreign trade scale, the difference of rate of return between RMB assets and foreign exchange asset, have very obvious correlativity with china’s currency substitution; but the difference of china’s inflation and foreign inflation, RMB-exchange-rate’s stability had no very obvious correlativity with china’s currency substitution.Finally, based on China’s future will be gradually liberalize capital-account’s control and the realization of the interest rate and exchange rate liberalization, this article puts forward five policy suggestions on china’s currency substitution risk prevention, which are keeps the stability of the monetary policy, continue to promote reform of interest rate liberalization, maintain the stability of financial policy, continue to promote macroeconomic progress, keep a certain cost between RMB and foreign currency exchange.