The Impact Of Foreign Exchange Reserve On Monetary Base

During the past two decades, Chinese foreign exchange reserve grows rapidly. In the old time, China had been shortage of foreign exchange reserve for a long time, but now it has the most foreign exchange reserves in the whole world. On the basis of the State Administration of Foreign Exchange statistics, China’s foreign exchange reserves had$3.181trillion in the end of2011, much higher than the second country Japan with$1.3trillion.At the time of foreign exchange reserves growing, the impact of the increase on the Monetary Base is also being obvious. Due to the growth of China’s foreign exchange reserves, the funds outstanding for foreign exchange increasing dramatically simultaneously. Funds outstanding for foreign exchange now have become the main channel which increases Monetary Base in the market. Under the impact of money multiplier, the amount of money supply exponentially increasing. China implemented the reform of the foreign exchange control system in the year of1994, the RMB exchange rate to the merger, which was due to the market supply and demand, a single and managed floating exchange rate system. In July2005the People’s Bank of China started the deeper reform of foreign exchange management system. China had started the implementation of "based on market supply and demand with reference to a basket of currencies, a managed floating exchange rate system." After the implementation of exchange rate reform, the RMB has remained appreciation. Until the end of2011, it had be appreciated33.1%. At the same time, China’s foreign exchange reserves remained growth rapidly, our foreign exchange increased exponentially, the proportion of foreign exchange in the central bank base money had increased dramatically after that. After the second reform, the amount of foreign exchange reserves increased larger than the first time, and the grow rate increased faster as well. China’s money supply structure change from previous mainly rely on domestic credit to foreign exchange be the dominant. As the country in the world has the most amount of foreign exchange reserves, the numerous amount of foreign exchange reserve which mainly based on funds outstanding had strengthen the entophytic of the base money launching. Thus, the independence of our monetary policy is seriously threatened.The appreciation trend of the RMB exchange rate become more obvious since2011, the exchange rate of Chinese yuan against the US dollar became higher and higher, the People’s Bank also announced plans to promote the reform of the RMB exchange rate formation mechanism further,"based on market supply and demand with reference to a basket of currencies to adjust the value of RMB. The exchange rate floating dynamic management and adjustment made sure the RMB exchange rate basically stable in a reasonable and balanced level". Thus, under the background of the further reform of RMB exchange rate formation mechanism, with the analyses of the impacts of foreign exchange reserves on monetary base of these two exchange rate reforms, it can be predicted that within the future exchange rate reform process, the impacts of the increase of foreign exchange reserves on monetary policy have a very great theoretical and practical significance.This article is not a single choose theories or empirical research as a research method, but the two combined. At first, it used the theoretical analysis of this study to draw theoretical conclusions, and then used the empirical method to an empirical test on these issues. This article will be consisted of five parts:The first part is the introduction part of the article. This section introduces the purpose of this research and the practical significance of the research, the introduction of domestic and foreign literature, sums up the academic achievements of scholars for the impact of foreign exchange reserves, the monetary base, lists the research method, chapter structure and innovations. The second part introduces the main content of the exchange rate reform and following results. The third part describes the theoretical used. Based on these theories, it analyses the impact of the foreign exchange reserves on monetary base, theorized to illustrate the growth of foreign exchange reserve and foreign exchange growth, foreign exchange reserves’ influence on monetary base mechanism. The fourth part is the empirical analysis, using a variety of measurement methods to analyses in the tow foreign exchange reforms foreign exchange reserves’ impacts on monetary base from a comprehensive and holistic comparative view. The fifth sector concludes the problems gathered from these compressions, proposes solutions to these issues.Chinese scholars have already a lot of researches on the foreign exchange reserves and money supply, but there are very few researches compare the influence of foreign exchange reserves with different foreign exchange system on monetary base. This paper attempts to the link exchange rate system reform and the impact of the foreign exchange reserves on monetary base. The comparative analysis of different exchange rate regime, the impact of the foreign exchange reserves on monetary base. This article may innovation lies, data used on foreign exchange reserves and base money is divided into two parts:after94reform and after05reform, through the analysis of the impact of foreign exchange reserves on monetary base, it concludes the possible outcomes that how the impacts of foreign exchange reserve under different foreign exchange rate system on monetary base will change.