| The increasing proportion of M2/GDP has become a unique economic phenomenon since China's market-oriented reforms.In order to offer a sensible explanation, this article, based on Friedman's monetary framework for theoretical analysis and McKinnon's theoretical research methods, introduces speculation, an important phenomenon in economic life, to money demand function, and contributes to the formation of a macroeconomic model, which helps to provide a more comprehensive explanation to the operation of underdeveloped economies. The only difference between this modal and McKinnon's is the consideration of a speculative market, whose existence fails to make valid McKinnon's policies and proposals regarding financial deepening although it has not changed McKinnon's basic point that raising real money balances will conduce to economic growth. In search of a path to sustained growth in the new model for underdeveloped economies, we bring forward a different proposal that the government should intervene in the speculative market. It is interesting to note that this policy will produce the same result as McKinnon's policies on financial deepening, that is, the increase in M2/GDP. To this end, we put forward a proposition about M2/GDP growth that with the presence of speculation M2/GDP growth results from the interactions between the government and speculators.Just as McKinnon shifted from his macro modal to policy analysis of financial deepening, we switch from our new model to relevant policy analysis, focusing on the double-track price system, which is a very unique institutional arrangement when China is undertaking market-oriented reforms. Therefore, the author studied speculative activities and government countermeasures under the double-track price system in two periods, and at the same time put forward the core viewpoint of this article: China's M2/GDP changes derive from speculation and control arranged by the double-track price system. On the one hand, implementation of double-track price system has artificially set up a speculative market, and ensured speculators indefinite profit space, making motives of speculative demand for money in the whole society continue to grow; on the other hand, the government has adopted the dual-track price system to exert influence over speculative risks and difficulties through a variety of control measures, making speculators increase their currency holdings. As a result, the capital in the traditional market will be attracted to the speculative market because of potential speculative opportunities. However, it only pushes the speculative money demand curve farther to the right, which suggests an increase in speculative money demand, but it does not rise as speculative commodity prices go up. In other words, the money supply to meet the needs of speculative money demand only exists as speculative fund waiting to buy with cash in hand. It will neither bring about an increase in output, nor will it give rise to any price changes. Judging from the index, money supply fails to correspond with nominal output, which accounts for growth in M2/GDP proportion.On these grounds we have arrived at a conclusion: in China, M2/GDP is a reflection of gradual reforms characterized by double-track price system in monetary and financial areas. Where it is heading for will depend on whether the government will continue to apply the dual-track price system to its subsequent market-oriented reforms. As for the monetary authorities, setting different intermediate goals of monetary policy according to varying M2/GDP proportion will help bring their macro-control function into better play.
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