Research On China’s M₂/GDP Ratio Problem

Since the reform and opening up, China’s M2/GDP ratio continues to rise. The ratiorise from32%to194.52%during1978to2013.This phenomenon has aroused wideconcern, known as China’s "currency of the mystery", which reflecting the uniquecharacteristics that different from other countries. We’ll analyze the reasons for thesituation and propose policy recommendations, which show important theoretical andpractical significance.In this paper, by analyzing related theories and literature, we found weak pointsand strong points from representative views. We describe the current situation ofM2/GDP and analyze the structure and trend, and then we found the long-term andcyclical characteristics. By the way of longitudinal comparison, we found that the ratioin our country is much higher than the developed countries (United States, South Korea,and Singapore), developing countries (Mexico, Thailand) and other emergingeconomies (India, Brazil). Theoretician and monetary authorities pay much attention inthe ratio and put forward a lot of reasons, but couldn’t reach consensus. This article putforward a Full explanation of high ratio by the view of money demand, money supply,financial institutions and bad bank assets. After a theoretical study, we have establishedappropriate econometric model for finding the reasons of high ratio of M2/GDP.Weselected five variables: velocity of money (V), economic growth rate（EGR）, the totalsavings rat（eTSR）, the ratio of domestic credi（tDCR）, foreign exchange system reform（G）.And then, we conduct empirical analysis based on annual data from1985to2013using Eviews6.0. Empirical studies have shown that there is a long-run equilibriumrelationship among M2/GDP, V, EGR, TSR, DCR, G. and V, EGR, TSR, DCR, G are allthe M2/GDP ’s Granger reason. Finally, we come up with conclusions based on thereasons of the M2/GDP high ratio and empirical analysis, and put forward thecorresponding policy recommendations.