The Study On The Change And Choice Of Money Supply Channel In China

Since 1999,current account in balance of payments of China continues to maintain a 17-year surplus while capital and financial account maintains a 14-year surplus except in 2012,2014 and 2015.Double surpluses make China's foreign exchange reserves rapidly increase.Under the pressure that the double surpluses continue to improve,the People's Bank of China is facing a problem that the exchange rate of RMB is growing quickly.In order to maintain the stability of the exchange rate of RMB,the People's Bank of China continues to buy foreign exchange in the foreign exchange market normally.In February 2006,holding 853.7 billion dollars of foreign exchange reserves,China surpassed Japan to become the country with the world's largest foreign exchange reserves.In the end of 2014,China's foreign exchange reserves amounted to $3.84 trillion.Huge foreign exchange reserves leads to a continuing increase in the foreign exchange which on the left side on balance sheet of the People's Bank of China.The proportion between foreign exchange and total assets increased from 39.73%in January 2002 to 83.32%in March 2014.Funds outstanding for foreign exchange channel has become the main channel of our country's money supply.Since reserve money locates on the right side,it would improve rapidly when the foreign exchange grows quickly while the central bank does not do the sterilization.In order to ensure an appropriate money supply,the central bank usually uses central bank bills,re-lending and adjusts the deposit-reserve ratio to sterilize which make the funds flow into the other accounts.But in recent years,the foreign exchange's fluctuation intensifies while the growth rate of foreign exchange slows down which make the base money corresponding reduce.In order to maintain moderate inflation and promote stable economic growth,the central bank needs to add a amount of money every year.When the fluctuation of China's foreign exchange intensifies,which as the main supply channel of the base monetary,we can use the foreign exchange which transferred to other accounts or the domestic credit channel to supplement the base monetary.This paper first summarizes the China's economic data from 2002 to 2015 and the actual operating conditions of the central bank which shows that the central bank bills,re-lending and the deposit-reserve ratio was used to sterilize before 2012.But since China's incremental foreign exchange suddenly dives,the remaining central bank bills cannot provide sufficient base money while the deposit-reserve ratio can still provide sufficient broad money.However,after using the Lee and Strazicich's model(2003),we find that the trend of narrower funds outstanding for foreign exchange had changed respectively on December 2003 and August 2010 while the broader funds outstanding for foreign exchange had changed on October 2006.Then by using Gregory and Hansen's cointegration model(1996),we find that the cointegration relationship between funds outstanding for foreign exchange and money supply varied which means the main channel of money supply has changed.The impact of the monetary base from funds outstanding for foreign exchange in central bank has changed in October 2010 while the impact of broad money from funds outstanding for foreign exchange in the banking system changed in January 2008.The empirical test shows that the variable funds outstanding for foreign exchange of the central bank was unable to make the monetary base increase steady and the effect of broad money from funds outstanding for foreign exchange of banking system has been transformed from positive to negative.In order to maintain liquidity in the banking system,central bank needs to strengthen the ability of supplying money.Finally,by comparing the impact on seigniorage and currency stability,this article concludes that the national debt channel is the better choice.