Research On Financial Macro-control In China Under Circumstance Of Excess Fluidity

This dissertation is written under the circumstances that excess liquidity has great negative impact on the economy of China and leads to higher attention in the academia and in actual economic departments which have taken many measures to solve the problem.1. Research objectivesThe objectives are to analyze the current situation of the fluidity so as to find out the real causes of the excess liquidity, to clarify its actual impact on the Chinese economy, and to objectively evaluate the effect of the financial macro-control policies; based on which, some reasonable policy suggestions are to be proposed to deal with the problems of excess liquidity.2. Research approachesThe most important methodological innovations in this thesis are that the concept of liquidity is defined from the perspectives of both connotation and denotation with precise formal logic methods, and the mechanism of the formation of liquidity and the causes of excess liquidity are explored with accounting activity procedures.Many analytical methods are used in this dissertation including positive analysis and normal analysis, quantitative analysis and qualitative analysis, technological analysis and institutional analysis, factual analysis and theoretical analysis, etc.3. Research contents and major findings(1) Re-definition of liquidityBased on the examination on the origin of liquidity, the specific attributes of liquidity are summarized and the connotation of liquidity is revealed through re-definition. On the basis of summarization of the development of liquidity theories, the categories of liquidity are divided and the denotation of liquidity through categorization. Liquidity is referred to as the degree of easiness of transforming assets into cash, while current assets are referred to assets with higher capacity of being transformed into cash. People are usually accustomed to call current assets as liquidity. From the macro-perspective, liquidity consists of citizen liquidity, enterprise liquidity, commercial bank liquidity, central bank liquidity, and government liquidity. The major forms of liquidity are cash, bank deposit, portfolio, notes, physical stocks, short-term credit, foreign exchange and other current assets. The daily liquidity report system for the primary dealers of open market operation promulgated by People's Bank of China stipulates that the liquidity of commercial banks is their cash in stock and deposits to the central bank.(2) Revelation of the essence and summarization of the phenomena of excess liquidityThe essence of excess liquidity is excess current assets, while the major phenomena of it are that there are excess cash, excess bank deposits, excess reserve of commercial banks, excess foreign exchange, excess vendibility of securities, and that commercial bank deposit is more than loan, etc. The essence of excess liquidity is reflected through the phenomena, while the phenomena reflect the essence of excess liquidity. However, the essence of excess liquidity is not the phenomena, and it is wrong to dissever the intrinsic relationship between the essence of excess liquidity and the phenomena, and it is equally wrong to take the essence of excess liquidity as the phenomena or the other way round.(3) Theoretical analysis of the causes and results of excess liquidityAccording to the connotation and essence of excess liquidity, the mechanism of formation of liquidity is analyzed and the causes of it are revealed through the clues of the transfer of liquidity in different economic sectors. And the transformation of the forms of liquidity is taken as the key point during transferring process of liquidity. The accounting activity procedures are used. The research shows that the causes of excess liquidity include over-increasing of money supply, excess favorable balance of international payments, rising prices of securities and real estate, expanding fiscal policy and so on. There are to some extent cause-result relationship between these reasons. The results of excess liquidity refer to the economic consequences (impacts on national economy) of excess liquidity. It is found that excess liquidity can cause price rising of consumer goods which will affect the living standard of citizens, lead to price rising of securities and real estate which will enlarge the risk of bubble economy, and influence normal operation of commercial banks which will weaken the functioning of financial efficiency. Under some circumstances, the cause-result relationship between the causes and excess liquidity is definite. The causes of excess liquidity should not be defined as excess liquidity itself, nor should excess liquidity be explained as the causes of excess liquidity causes. Similarly, under some circumstances, the cause-result relationship between excess liquidity and the results of excess liquidity is definite. Neither should excess liquidity be explained as the results of excess liquidity, nor should the results of excess liquidity be explained as excess liquidity itself. Excess liquidity has retroaction to the causes of excess liquidity, and results of excess liquidity have retroaction to excess liquidity, too. On certain conditions, their cause-result relationship may reverse, even more complicated.(4) Analysis of the characteristic facts, causes and impacts of excess liquidity in ChinaThrough the analysis of the characteristic facts of the excess liquidity, the basic judgment is made that excess liquidity has existed in China for a long period of time. The characteristics of excess liquidity are that capacity elasticity of excess liquidity is bigger; excess liquidity has last a long time, and excess liquidity phenomena is focused on excess foreign exchange assets of central bank and excess bank reserve of commercial banks.The research shows that excess money supply is the direct cause of excess liquidity, while the increasing favorable balance of international payments is the fundamental reason. The Rapid increases of exports and continuous expansion of FDI inflow lead to the continuous increase of favorable balance, and People's Bank of China buys foreign currencies from different sections and micro-economic entities and sells large sum of the Chinese currency through foreign exchange settlement system and through open exchange market operation, then excess liquidity situation at home becomes worse and worse. Besides, proactive fiscal policy, export-encouraging policy, income distribution policy and exchange rate regime are important reasons for excess liquidity.The research also shows that early excess liquidity has less significant impact on national economy. The reasons are as follows: early excess liquidity is not as serious as nowadays; the huge economy of China has very big capacity elasticity of excess liquidity, and it requires a long time lag to influence economy; early excess liquidity is mainly concentrated in banks and does not flow into market, so it has little impact on national economy. In recent years, excess liquidity increases rapidly and at the mean time central bank lowers reserve rate of commercial banks to a very low level, then excess liquidity flows out of banks into the market, and causes more and more negative impact on national economy.The most important impact of excess liquidity on national economy is the rising price level. Both the rising consumer price and the rising real estate price have a bad influence on the living standard of citizens, and badly impact the normal economic system.(5) Analysis and evaluation of the financial macro-control policiesThe financial macro-control policies are analyzed in detail, and it is found that before 2002 traditional policy tools were mainly used for financial macro-control, which did not aim at excess liquidity; from 2002 to 2006, many innovative instruments were used to directly adjust excess liquidity; since 2007, attention is paid to resume and strengthen traditional tools, based on continuous innovation.Two criteria are proposed to evaluate the effects of financial macro-control policies: one is the change of excess liquidity; another is the negative impact of excess liquidity. According to the two criteria, the practical effect of financial macro-control policies is evaluated, and the conclusion is that several problems exist while the general effect is good.(6) Basic approaches and policy suggestions on future financial macro-control policiesSince it is difficult to remove the causes of excess liquidity in China in a short period of time, to deal with excess liquidity, the financial macro-control policies must be coordinated with other policies, and be guided under correct principles, and have improved instrument system and specific targets. At the mean time, unnecessary worrying should be relieved and systematic errors should be avoided.The keys to the policy coordination among the Chinese financial macro-control are: the coordination and combination of financial policy and fiscal policy; the moderate principles, independence and flexibility; intermediate goal of control of the scale and structure of excess liquidity; final goals of stabilizing price level first and promoting economic growth second; traditional tools plus active innovation; two unnecessary worries be relieved that economic growth will slow down and unemployment will increase; the main misunderstanding to be avoided : to "go abroad" and to restrict export unreasoningly.