An Empirical Research On China's Currency Substitution Influence Factors

In the fixed exchange rate system and closed economy, it's difficult to cause currency substitution phenomenon. However, with financial liberalization and the development of global economy, currency substitution will become an economic problem which is common and can't be neglected. There are different degrees of currency substitution in almost every country of the world. Currency substitution will bring many adverse effects, if this problem can't be handled properly, it may produce huge impact on a nation's macro economy. To specify it more clearly, currency substitution will aggravate the economic fluctuations,cause exchange rate less stable, weaken the monetary policy effectiveness and inflation tax base, influence government financial financing ability, interference national exchange control, eventually make a country's economy and finance can't operate normally.With the constant change of the economic environment at home and abroad, economic factors that influence currency substitution are changing too. So, it's necessary to give a further research to our country's current currency substitution problem. This paper first summarizes the classification, formation, and the impact on the economy of currency substitution, and think that currency substitution is caused by objective economic development and the rational choice of the public. Currency substitution will bring both beneficial and adverse effects to economy, but mainly adverse impact. Then use index Fd/M2 to calculate China's currency substitution degree, Fd represents foreign currency deposits of one country's enterprise and residents (not including the financial sector and the government department) in domestic financial system while M2 represents broad money supply. The results show that currency substitution problem of our country is not serious at present.The currency substitution degree is not high and become more and more low, this is mainly caused by increasing broad money supply of our country. In this paper, the currency substitution influence factors is divided into macro and micro factors. Considering that there was a exchange rate reform in July 2005 in our country, so this paper adapts from August 2005 to December 2010 monthly data for analysis, and choose actual industrial gross domestic product, domestic and foreign nominal interest rates spread, domestic inflation rate, RMB nominal effective exchange rate and its volatility level as currency substitution impact factors to establish VAR modle and VECM. Meanwhile Granger causality test, variance decomposition, JJ cointegration test, impulse response etc econometric methods are also used. The conclusion is that there is a long-term balanced relationship among currency substitution rate and actual industrial gross domestic product, domestic and foreign nominal interest rates spread, domestic inflation rate, RMB nominal effective exchange rate and its volatility level after the reform of exchange rate. What's more, the long-term equilibrium can be adjusted in short term. In the long run, the currency substitution rate is negative related with actual industrial gross domestic product, domestic and foreign nominal interest rates spread while it's positive related with domestic inflation rate, RMB nominal effective exchange rate and its volatility level.Finally, this paper suggests some polices to decrease the currency substitution degree and the further study direction is RMB internationalization problem. The innovation of this paper is to study the relationship of the currency substitution and its influence factors after the reform of exchange rate, and the influence factors are considered comprehensively, including actual industrial gross domestic product, domestic and foreign nominal interest rates spread, domestic inflation rate, RMB nominal effective exchange rate and its volatility level. In data selection, choose the monthly data of the variables, so the data interval is longer while most of scholars are using quarterly data. The shortage of this paper is that the understanding of currency substitute theory is mostly based on the domestic scholars'studies, and the discussion of western currency substitute theory is not in-depth, so there are some limitations in theory and method.