The Measurement And Factors Of China’s Excess Money Supply

Rapid growth of money supply constitutes a major feature of macro economy in China for 30 years. By the end of 2015, broad money(M2) balance was 1.3923 trillion RMB, narrow money(M1) balance 40.1 trillion RMB and currency in circulation(M1) balance 6.32 trillion RMB, respectively 236, 332 and 954 times of that in 1979, surpassing the total economic increase rate over the same period. In the meanwhile, economic monetization index M2/GDP is above 2.29, higher than that of the other major countries in the world. Yet generally, inflation in China is below 5%, floating in a mild state. This imbalance among money supply, output and price level is called “Chinese Puzzle” by Mekinnon. The phenomenon is studied by scholars, and some of them propose hypotheses based on Fish equation on excess money supply in China, including “Monetization hypothesis” and “Forced saving hypothesis”, to explain the excess money supply in China.Based on foreign and domestic literatures, and the macro economy transformation in China as well as the actual situation of economic globalization, the author changes the research framework utilized in previous literature. Assumptions of “circulation speed of currency never changes” are loosened up, and cooperative function of real and virtual economy is taken into consideration. The dissertation promotes a new way to calculate the excess money supply in China. How four factors---monetization of economy, saving rate, development of capital market and surplus of international balance of payment---exert influence on excess money supply is analyzed with examples. As a result, excess money supply manifests a stage feature in M2 level. Monetization of economy, saving rate, development of capital market and surplus of international balance of payment expedite the excess money supply. In the long run, counteracting the influence exerted by excess money supply on economy in China requires adjustment of monetary policy and reform of foreign exchange management; at the same time, consumption, and investment and saving of economic entities should be improved as well.