Foreign Exchange Reserves, The Money Supply

Following the open policy enforced widely and deeply, the dependency on outside parties of the economy is more sensitive. The reserve of the foreign exchange and the supply of money has direct relationship, it is especially obvious after the innovation of the foreign exchange manage system, which is characterized by obligated sale and buy FX system and floating FX rate based on the market supply and demand. The total amount of the FX reserve got to 100 billion USD dollars in Feb 1996, reached 200 billion in Oct. 2001, and get No.1 in Feb.2006.The FX reserve increase quickly, and it can bring us many profit, such as elevate the power of China, the confidence of the RMB, and the inflow of the capital. At the same time, it can bring bad effect to our economy system. Firstly, the increase of the FX reserve induce the increase the percentage of the FX to monetary supply, the base money is put into the economy more quickly, and may induce the inflation crisis. Secondly, it changes the system of the monetary supply, and makes the operation of the monetary policy confused. This paper consists of 4 part:The first part: This section points out the relationship of the FX reserve and the monetary supply, summarizes the study effect of China and foreign professors. According to the China fact, the paper analyses the correlation of the FX reserve and the monetary supply with statistic software Eviews.The second part: From the perpective of the trade, capital, and limitation of the FX rate system,this section analyses some factors how can it impact the monetary supply, which influence the FX reserve. From the perpective of the trade, capital, and limitation of the FX rate system.The third part: Through the effect of FX reserve of the monetary supply, we can see the effect of FX reserve to the monetary policy, this paper analyses the fact from the point of the independence of the monetary policy and the its efficiency.The fourth part: Analyzing China conditions and usual international monetary tools, this paper provide the long term and short term monetary tools.The key point of this paper demonstrates the high relationship between the FX reserve and monetary supply, and the money occupied by foreign currencies is the main factor influence the money supply, which makes the operation of monetary policy difficult. The innovation of the paper relies on the using of the Eviews to prove the correlation between the FX reserve and the money supply, and give some advice to it.