Research On Financial Stability Under Excess Liquidity And Asset Bubbles

At present, China's macro economy is facing excess liquidity, RMB appreciation, inflation, asset bubbles and other problems, which has become a potential threat to China's financial stability. Just as the deviation away of China's economic development from the classic theory of western economics, China's financial stability also has its own particularities. Under the current excess liquidity and asset inflation bubbles, whether China can maintain its financial stability has direct impact on whether China's macro economy can maintain a sustainable, healthy and stable development, therefore this paper bears not only urgent practical meanings, but also certain theoretical value.To discuss how to maintain the financial stability in China, we shall first discuss what elements will threat the financial stability in China. This paper first makes clear the roots of excess liquidity, RMB appreciation, inflation, asset bubbles and other questions and their interactions. It also points out that under the new macro situation, we shall have new understanding of the connotation of financial stability and new thoughts on measures of financial stability. The central bank shoulders the important duty of maintaining financial stability in a country. Based on a systematic analysis and illustration of the new connotation of financial stability, this paper discusses the new functions of central bank in maintaining financial stability under new macro economic situation and the new thoughts in macroeconomic control. It is generally believed that the biggest harm of excess liquidity is to lead to the asset price bubbles in China; however, the reality is that simple deflation of liquidity helps little in solving the problem of asset inflation bubbles. At present, Central Bank shall give top priority to the handling of asset bubble problems in maintaining financial stability. This paper thinks that the central bank shall not blindly puncture the bubbles and that the bubble control shall exceed the range of increasing the rate of reserves against deposit and the interest rate. By far, the asset bubbles have not yet endanger the financial stability and economic development of China; however, the many uncertainties facing China's economy requires us to have a common sense of"being prepared for dangers in times of safety". The last part of the thesis analyzes the questions that may occur in economic financial system and corresponding policies on financial stability when there is economic downturn and bubble burst.The major innovations of this paper lay in the following aspects: firstly it analyzes in depth the potential threat to China's financial stability in a systematical way; secondly, based on current literatures on financial stability, it puts forward the new connotation of financial stability under new situation, especially the measures of central bank on handling asset bubbles. The analysis and suggestions of this paper is different from the existing literatures, therefore it has a relatively higher policy referential value for the current status of China; thirdly, based on model analysis, this paper discusses the relationship between bubble burst and capital flight, as well as the possible influences on finance and economy. And on this basis, this paper holds that we shall go beyond the traditional currency policies to maintain financial stability.