Research On The Impact Factors Of Currency Substitution In The Process Of China's Financial Opening

Due to currency convertibility,when more serious inflation or devaluation expectations appears in a country,the domestic public for lower transaction costs and the value of assets,will reduce the domestic currency holdings and hold the foreign currency with a relatively high value,this phenomenon is often called "currency substitution".Currency substitution can be seen as the phenomenon that bad money drives out good.Currency substitution has changed the demand for currency,and will have an important impact on a country's economy,such as reducing government inflation tax,increasing exchange rate fluctuations,and weakening the effectiveness of monetary policy implementation.The degree of currency substitution depends on the economic growth,the exchange rate level,the difference of the real yields between local currency and foreign currency,the inflation rate,the institutional factors,etc.In 2005,the reform of China's RMB exchange rate formation mechanism started and the aim is to establish a single,managed floating exchange rate system based on market supply and demand,referring to a basket of currencies.Financial institutions,enterprises and residents actively participate in foreign exchange market transactions,and the RMB exchange rate flexibility continues to increase.It is more convenient for enterprises and residents to hold foreign currency and foreign currency assets in the form of channels,scale and hedging tools.In 2014,China began to bid farewell to the RMB for 4 consecutive years of unilateral appreciation trend,and in December 2016,RMB exchange rate against the U.S.dollar fell to nearly six years low.What RMB exchange rate became lower,especially the sharp reduction of China's foreign exchange reserves in 2015,attached the government's concern about capital outflows.Now,the domestic economic situation has not stabilized,and the U.S.economy recovery strongly.With the start of Fed rate hike cycle,the RMB exchange rate against the dollar is facing further devaluation and the currency substitution gradually will increase.In this paper,based on absorbing and referring to the domestic and foreign literature on currency substitution,we comprehensively discussed the theory of currency substitution,including the mechanism,the impact factors,the effect on the economy and so on.In the systematic study of the currency substitution problem and the specific circumstances of Chinese at present,we make the theoretical analysis and empirical analysis of currency substitution in China,and finally put forward some prevention policy recommendations of currency substitution risk in China.In the empirical,based on monthly data from July 2005 to December 2016,the paperanalyzes the influencing factors of currency substitution in the framework of the currency demand function by using the bound testing approach based on ARDL-ECM model.Empirical test shows that the China's currency substitution has long-term co-integration relationship among economic growth,the real effective exchange rate of RMB,the exchange rate expectation changes of RMB,interest rate spread between China and U.S.,the difference in inflation rates between China and the United States,asset prices and super currency;economic growth,the exchange rate expectation changes of RMB,interest rate spread between China and U.S.have negative correlation with China's currency substitution;but the super currency,asset prices have positive correlation with China's currency replacement.