A Study On The Relationship Of The Foreign Trade Balance And Money Supply In China

With the economic reform, there’s a rapid development in China’s Foreign Trade.It characterized its interlaced appearance of surplus and deficit before1994, but sincethe year of1994China had a continuous trade surplus. China has graduallytransformed into reverse-two-gap country from two-gap country. Savings glut andsurplus has been continuously increasing in China.With the increase of surplus and accumulation of foreign exchange reserves, thedomestic money supply has also increased. The monetization rate rose from31.8%in1978to187.58%in2012. Replacing the reloan of commercial bank, fundsoutstanding for foreign exchange has already been the main way of base currencysupply at the same time, which changed the way of money supply. From1994to2012,the proportion of the commercial bank’s reloan in base currency decreased from60.70%to6.62%, while the funds outstanding for foreign exchange’s proportionincreased from26.03%to93.79%.Based on the basic model of macro economics, the balance of foreign trade andmoney supply are interrelated under the specified conditions, and they mutually affecteach other. Analyzing the changes of demographic structure it shows these changeswill alter the condition of family’s intertemporal decision. As the changes can make apreference for current consumer goods, it can also increase the surplus and affect themoney supply.Using the method of EGLS, we choose the panel data of China and other22countries from1991to2010as sample. The conclusion shows the factor that affectingthe foreign trade balance including the national income of the trade partners, thenational income of China, the general price level of trade partners, the nominal rate ofChina and previous foreign trade balance. Then, by using the monthly data of Chinafrom January1996to December2011, it proves that foreign trade balance has anotable effect on the broad definition of money supply, the narrow definition ofmoney and the currency circulation before January2009. The short-run variation offoreign trade balance promotes the currency circulation notably from January2009toDecember2011. And by using15countries’ annual panel data including China from1991to2010as sample, it shows that there is a long-run stable balanced relationshipbetween foreign trade balance and money supply，and the changes of foreign trade balance also results in the transformation of board and narrow definition of moneysupply. In the short run, the foreign trade balance and the board definition of moneysupply have the same trend.Based on the provincial annual statistics panel data of Mainland China and20main countries from1989to2010, we establish cointegration model and ECM model.The result shows that the proportion of working-age population has a positive effecton foreign trade balance in both short run and long run, especially in China. At last,by using the provincial annual statistics panel data of China and that of18maincountries from1989to2010including the multiplicative interaction term ofdemographic structure and foreign trade balance, it shows that the proportion ofworking-age population is the main factor that affects money supply. And asexpanding of foreign trade balance, the increase of proportion of working-agepopulation will bring more money supply.When the economy is overheated, the Central Bank of China can adopt floatingexchange rate policies. It can relieve the pressure of inflation and keep the balance ofnational market which the money supply expand brought by the foreign trade balance.On the other hand, when the economic growth slows down, the Central Bank of Chinacan adopt managed floating exchange rate policies. This can make the continuoussurplus as well as expansion of money supply. The Central Bank of China can alsoboost its output and increase their national income then it will have a sustained, stableeconomic growth. And the population policy should also be changed at the right timeto avoid the problem of deficit which brings by the variation of the demographicstructure.