The Causes Of Excess Liquidity And Its Effectiveness Of Monetary Policy

The problem of excess liquidity in China has drawn great attention from the society since year 2005. The paper introduces the current situation of excess liquidity and economic performance in China through data and charts at first. And then it divides the causes of excess liquidity into two parts. As for the external factors, the paper reveals that current account surplus caused by export-oriented trade pattern and capital account surplus caused by expectation of RMB revaluation make China accumulate large amounts of foreign exchange reserves. Due to the policy of mandatory exchange settlement and fixed exchange rate system in China, the increasing amounts of foreign exchanges reserves force the central bank to issue base currency, which leads to the problem of excess liquidity in the mainland. As for the internal factors, the problem of excess liquidity was influenced by citizen's high saving ratio and low consumption ratio, more and more loan volume in banking system, structural imbalance of liquidity and so forth.In order to curb the overheated economic development, the central bank tightens the monetary policy further. However, the effect of tightened monetary policy is far from satisfactory. The paper argues that the monetary policy is affected by the causes of excess liquidity. The independence of monetary policy is interfered with large amounts of current account surplus. It is also trapped into dilemma because of the inflow of international hot money. Citizen's behavior in saving and consumption and low interest rate elasticity of the demand also weaken the effect of monetary policy in solving the inflation and excess liquidity problem. Further more, the differences of the targets between banks and monetary policy exert negative effect in tightened monetary policy. The structural imbalance of excess liquidity and illegal use of the funds among enterprises no only leads to the excess liquidity, but also disturb the normal operation of the current monetary policy manipulated in China.At last, the paper proposes some advice and suggestion to solve the excess liquidity problem and enhance the effectiveness of monetary policy, including relaxing mandatory exchange settlement policy, strengthening supervision of capital account, improving income distribution and social security system and so on.