Research On The Factors Affecting Currency Substitution And Counter-substitution In China

After the collapse of the Bretton Woods System, floating exchange rate system replaced fixed exchange rate system and global economic integration is taking its step further, American financial crisis whose eruption heavily hit its economy lead to the low ebb of U.S. Dollars. At the same time, China’s economy grows rapidly with its furthered degree of opening up to the outside world and increasingly expanded imports and exports. As a result, it is unavoidable that foreign currencies and Chinese currency will substitute each other, making a remarkable difference on Chinese economy and financial order whether or not its China’s currency substitution or currency counter substitution . Accordingly, it is suggested that we should make a research on the influencing factors of China’s currency substitution and currency counter substitution and take measures to protect the risk of excessive substitution.This paper constructed a model for empirical analysis based on the monthly data from January 2007 to December 2016. Through the VEC model, this paper analyzed the long and short relationships between all factors and China’s currency substitution and currency counter substitution, demonstrating all factors’ contribution rate by variance decomposition.We found that there is a positive relationship between China’s currency substitution and its macroeconomic growth and pricing level while a negative relationship between China’s currency substitution, the spreads between China and foreign currency and nominal effective exchange rate, there is almost nothing with import and export volume. As for China’s currency counter substitution,there is a positive relationship between China’s currency counter substitution and macroeconomic growth,the spreads between China and foreign currency and export volume while a negative relationship between China’s currency counter substitution and pricing level,nominal effective exchange and import volume. The variance decomposition told us that nominal effective exchange rate and pricing level are the major influencing factors of the change of China’s currency substitution rate while other factors contribute less; Nominal effective exchange rate and the spreads between China and foreign currency are the major influencing factors of the change of China’s currency counter substitution rate while other factors contribute less.