Liquidity Shocks And The Choice Of Macro Policy In China

Liquidity is one of the important factors that affect China’s economic development. After the reform and opening up, China has owned30years miracle of high economic growth which may owes this performance to the help of loose liquidity conditions of these years. In recent years, China’s currency increment and stock are both the first place all around the world, which mainly reflect by the credit of commercial Banks. Therefore, dealing with the problem of liquidity should mainly pay attention to the problems of commercial banking system’s liquidity.The change of liquidity is mainly through the price effect and psychological expected effect to impact on financial market. The price effect of liquidity reflects in change of prices, asset prices, interest rates and exchange rate. In terms of the impact on the real economy, liquidity is mainly through the credit of commercial Banks effect, the enterprise’s balance sheet effect, personal wealth effect and the effects of government spending and the balance of payments effect to influence the consumption, investment and net exports, which then influence the development of the overall macroeconomic. In this paper, through the granger causality test and impulse response analysis based on the VAR model, the results find that domestic liquidity shock is mainly through investment to ultimately affect the change of the gross domestic product (GDP).Despite the uncertainty of the economy of major developed countries in the future, America will first exit the quantitative easing monetary policy which is an inevitable trend, thus emerging market economies such as China will face the negative impact. The change of currency liquidity of U.S. is mainly through the balance of payments and the psychological expectations to affect China’s liquidity environment and the macroeconomic of China. The effect of balance of payments is divided into trade effect, direct investment effect, speculative arbitrage effect and the import of foreign exchange effect. In this paper, based on the recent historical data, through the granger causality test and impulse response analysis based on the VAR model, the results find that the change of the broad money supply M2of America can markedly impact on China’s broad money supply M2and the GDP of China.The control of liquidity is a complex problem. China’s central bank is primarily through monetary policy to solve the problem of excess liquidity and liquidity shortage. In the future, on the one hand, the monetary policy should be further improved, on the other hand, other diversified policies should actively be taken to cope with the liquidity problem. Governments and central Banks should not only pay attention to the amount of liquidity, also should pay attention to the structure of liquidity and the market expectations of liquidity.In the future, ultra-loose monetary conditions will not be continued, relevant measures should be taken to face this situation actively, at the same time, this opportunity should be taken to promote economic structure transformation and to control lever. In response to the United States withdrawing from the quantitative easing monetary policy, China should guard against the risk, also should grasp this opportunity to continue to push forward the construction of the financial system and to expand the influence of China’s economy.