The Quantitative Easing Monetary Policy Impact On China’s Currency Liquidity

Since the 2008 crisis era, major Central Banks, represented by the fed’s, have implemented quantitative easing monetary policy to provide liquidity to the market by expanding the central bank balance sheet and lowing long-term interest rates, in order to fight against the deterioration of the real economy by the financial crisis and deflation pressure. Quantitative easing not only created power for economic recovery in the United States, also brought vitality to emerging economies led by China. The global market is huge injections of liquidity and a large number of international capital flows to emerging economies. Five years after QE1, with the employment rate ascension and economic returning to normal levels, the United States announced that from January 2014, the fed would cut quantitative easing asset purchases. In October 2014 the fed announced the United States started to stop quantitative easing. Thus a storm of international capital flight in emerging markets, and China can’t avoid, either. Quantitative easing impacted on the international capital flow, China’s mobility and Chinese monetary policy.The paper is divided into five parts. The first part is the introduction of topic background and significance. Through sum up the characteristics of the previous literature, we can find the direction of the depth of mining and breakthrough. Also, this part mentions metasomatic overall framework, advantages, disadvantages and the innovation point of this article. The second part introduces the concept of "quantitative easing", theoretical background and evaluation and explains its concept and theoretical basis of the international conduction and spillover effects of transmission channels, for the observation of the international capital flow below. The third part observes structure of international capital flow and the balance of payments. The paper finds that China’s international capital flows is influenced by the quantitative easing of America and draws the conclusion of short-term international capital flows are driving changes in foreign exchange reserves, and the change of the foreign exchange reserves will affect the money supply, then affect monetary liquidity. The fourth part through the establishment of VEC model analyzes the exchange rate, interest rate, on behalf of the fed’s quantitative easing indicator for medium and long-term Treasury bonds and mortgage-backed securities accounts for the proportion of total assets and the short-term international capital flows of hot money influence on China’s currency liquidity. The fifth part put forward the suggestions that Chinese should take what measures and policies to cope with the effects of the from the United States quantitative easing monetary policy.In this paper, by using the VEC model from the perspective of international capital flows to the United States quantitative easing impact on China’s currency liquidity for empirical analysis. This paper uses the VEC model and to analyze the United States quantitative easing impact on China’s currency liquidity for empirical analysis from the perspective of international capital flows. The result shows that: the international capital flows under quantitative easing, the amount of U.S notes, bonds and MBS compared to total assets; interest rate spread between China and U.S and the exchange rate truly have impact on China’s currency liquidity. On the other hand, China’s monetary liquidity may also affect international capital flow:liquidity enhancement caused inflation and there is an expected decrease in the Chinese interest rates and the value of RMB. Though conducive to foreign trade, due to its profit-driven, the short-term capital is outflows from China.In this paper, there are 3 main innovation points:first, through the observation and analysis of "new normal" international capital flows, the paper emphasizes the impact of the quantitative easing of America on short-term international capital flows to China. At the same time the paper puts forward the "new normal" situation of the relationship between foreign exchange and liquidity to provide strong support for below policy suggestions. Second, this article through the quantitative easing on the analysis of the influence of international capital flows, from the perspective of international capital flow to study the quantitative easing influence on China’s currency liquidity, and analyze the adverse effect of monetary liquidity to international capital flows. Third, many papers about quantitative easing monetary policy focus on China’s money supply, inflation, output, exchange rate and so on. The.paper will use M2/GDP as an indicator on behalf of the Chinese currency liquidity. From the perspective of monetary liquidity the paper provides spillover effects research with a new direction.