The Research Of China’s Currency Substitution Influencing Factors

Currency substitution in developing countries in the process of opening is an inevitable question.The domestic residents are lack of confidence in the stable value of local currency,or yield of currencies is low.Then the local currency will be converted into foreign currency by the domestic residents.The local currency will be replaced by foreign currency in all or part of functional aspects such as: in the store of value,medium of exchange and value measurement currencies.China’s financial system is in the constantly reform,especially after exchange rate system reform in 2005,mainly "based on market supply and demand,referred to a basket of currencies,managed floating exchange rate system".Under such exchange rate system,the phenomenon of currency substitution is more likely to appear.In this paper,the influencing factors of China’s currency substitution was fully explored.The data was collected from 2009 to 2014,including RMB exchange rate,GDP,differences of interest rates between domestic interest rates and abroad interest,domestic inflation,etc.Based on the existing results of the scholars’ research,this paper used the method of empirical analysis on the sample data,and get the main conclusions as follows:Firstly,the exchange rate change of currency substitution is the most mainly factor.The main purpose for people processing currency exchange is to avoid exchange rate risk.This feature of currency substitution hints: although the current currency substitution degree is low,but along with China’s capital account opening,the improving of exchange rate system and advancement of the internationalization of RMB,it is still likely to cause massive currency substitution in China.Secondly,there is no significant impact on China’s currency substitution of GDP,the difference of interest rate,the rate of inflation.In general,China has not yet entirely market-oriented,GDP is rising steadily,inflation rate is not high.All of that mentioned is leading to the limited interpretation of the currency substitution.At the end of the paper,regarding to the situation of China,the paper puts forward some policy suggestions as follows: the implementation to ensure that the macroeconomic policies of currency stable,improve the real yields of RMB,to strengthen the construction of financial market system,to increase the reputation of RMB and to improve regulatory system and prevention system,to strengthen the currency substitution research.