On The Endogenous Characteristic Of China’s Money Supply Over The Last Ten Years

Among the theory of money supply, there has been extensive argument of themoney supply is exogenous or endogenous. Classical quantity theory of money startsfrom the phenomenon of currency in circulation, based on the invariant relative priceof commodities, study on the relationship between the amount of money in circulationand commodity prices, they believe that money is neutral, which is exogenous. In theopinion of modern Monetarism represented by Freedman, the central bank caninfluence the commercial bank and the public behavior through changing themonetary base, so as to control the money supply, so the money supply is exogenous.Keynes believes that the money supply is dictated by commercial bank loan, whichfrom the enterprises and individuals, and not the exogenous variables that can becontrolled by the central bank. Post Keynesian established a complete theory ofendogenous money supply theory in succession and improvement of the Keynesmonetary theory. According to this theory, money is mainly produced by thecommercial bank loans when the human economic society coming into the creditcurrency stage, so the truth is, the bank loans creates the bank deposit, rather than thecentral bank pushing more money into the economy actively. At the same time, theybelieve the stock of money is determined by demand, but the interest rate isdetermined by the central bank. Since the central bank to release base money shouldbe subject to economic activities of commercial banks and enterprises and family,leading to the failure controlling the supply of base money. Post Keynesian furtherbelieves that even the money multiplier is determined by the monetary demand of theprocess of market transactions. Thus, not only the broad money, even the monetarybase can be regarded as endogenous money. They think, if the central bank can’tcontrol an economy internal loan amount, it is unable to control the internal moneystock of economies. The theory of endogenous money supply through long-term development andperfection, has been gradually accepted by the Chinese and foreign academic circles.Researching on money supply, should not only focus on the endogenous moneysupply, but also pay more attention to the cause of it, that is the economic activities ofthe government, enterprises and individual in the economic behavior of the moneysupply. The endogenous money supply theory should be used to the reality of ourcountry economy and the monetary policy implementation process, and we need toexplore the practical value of economic practice in our country application.In the past ten years, China’s monetary supply is increasing year by year,especially since2008, in response to the impact of the world economic recession,China adopted4trillion RMB economic stimulus plan, the money supply whethertotal or growth, have substantially rise, this is one of the important factors causingChinese money supply beyond100much trillion RMB. On the change of China’smonetary policy and money supply over the past ten years, credit expansion, the surgein foreign exchange reserves, financial deposit and payment changes, exchange ratefluctuations and other micro-main factors in the market, have more deeply influenceon China’s money supply changes, that the endogenous characteristic of China’smoney supply is increasing.For the stability of China’s money supply, and thus the stability of economicactivity, first, the central bank should strictly control the bank credit’s quality andscale, one hand is to ensure that banks have sufficient liquidity, the other hand is torationalize the loan; second, the mandatory settlement system should be furtherreformed and innovation, realize the real managed floating exchange rate and thewillingness settlement, reduce the write off the central bank makes passively, in orderto reduce the supply of base money. This can make the foreign exchange reserves givefull play to the function of "reservoir", on the other hand can make an inventory ofmicro-main holdings of foreign exchange reserves; third, making the treasury depositsand fiscal spending as an important means to control the money supply. To break thecurrent pattern of our country, not only the fiscal function of China, but also China’sfinancial sector, overall and control of loanable factors of our reproduction, reconstruct macro financial structure of "combined with fiscal and financial"; fourth,pushing forward the market-oriented reform of interest rates steadily, playing the roleof interest rate on the money supply actively.