The Impact Of Inflation On The Change Of Money Supply In China Based On M2 / GDP Ratio

Since the reform and opening-up of 1978, the supply of money becomes more and more, with the economy developing fast. To compare with developed countries, our country’s M2/GDP has been far more than America, Germany, The British and so on. At the same time, the upward trend seems not to stop. What is the reason of the economic phenomenon? Weather the economic phenomenon deviating from general economic law will be harmful to our country? To the first question, many scholars have done much research, but to the second question, there is only a little research. At this time, figuring out the reason of high ratio of M2/GDP, and analysing weather there is inflation risk behind this will be important to our economy of transition.First, this article has described the process of our country’s monetization. Then, compare with other countries. Third, analyse the long-term trend and cyclical trend. Forth, analyse the reason of high ratio of M2/GDP. After that, analyse weather there will produce inflation, from the total and the structure of the supply of money. At last, we find that our country’s money velocity has been declining from 1978, but the velocity has become more and more slow from 2000. In a word, our country’s money velocity has become fast. That means monetary liquidity may excess. At the same time, the supply of money has raised because of current account and capital account are surplus. And this results in inflation to some extent. The financing form of our country is rare. The indirect financing form is the main way. So the inflation will occur because of the loan expended. The quasi money of our country is not the real money because the quasi money can not be used in transaction. Our country’s residents’ propensity to save is much high on account of reformation in the field of housing, medical treatment, education, provide for the aged and state-owned enterprise reform which bring about uncertainty. More over, the financial innovation is insufficient, and the invest way is few. So, if the quasi money becomes M1, inflation will occur. If quasi money gets into the virtual economy, it will become hype capital and raise up the price of virtual assets, thereby disrupt the financial market. In the end, this article sets up the model of VAR. After the empirical research, we find that the liquidity ratio-M1/M2, M1, the loan of the bank and foreign exchange will produce positive influence to CPI. Thereby, we propose some policy suggestions on how to guard against inflation in the period of transition.