A Study On The Impact Of Foreign Exchange Reserve On Money Supply In China

Foreign exchange reserve is one important component of one nation’s internationalreserve asset, and a symbol of one nation’s power.Since the entrance to WTO in the end of2001, China has undergone a long period of “twin surpluses”—current account surplus andcapiatal account surplus and accumulated an increasing number of foreign exchange reserve.During the same time, the monetary policy operation of People’s Bank Of China(PBOC) wastageted to retrive the liquidity injected though the incresement of foreign exchage reserve,using the monetary policy tool of issuing central bank notes and frequently adjusting the legalreserve requirement ratio.Owing to the financial crisis happened in2007, the pace of theaccumulation of foreign exchange reserve has slowed down. During this period,however,China’s broad money supply(M2) seemed to gain a new impetus.Particularly in2009,the growth rate ammounted to27.70percent.When it came to the second half of2011,China’s foreign exchange reserve became the focusing problem again, not because itsincreasing,but its declining for a quarter, which is extremely rare.With the fluctuation of theforeign exchange reserve growth, PBOC’s long dependence on the accumulation of foreignexchange reserve to inject liquidity will change in the foreseeable future.The research objectives of this paper is to analyze different phases of the impact of theaccumulation of foreign exchange reserve on the money supply in a comparatively thoroughmanner, try to find the reason and make some practical and concrete suggestions based on theforeseeable profound changes of the economic and financial structures.This paper firstanalyze the periodical characteristic of the increasing of the foreign exchange reserve and themoney supply and the reason lying behind the phenomen and the trend,and then analyze thetheory and the mechanism of foreign exchange reserve’s impact on the money supply.Basingon the analysis above, this paper does an empirical study on the impact of the accumulation offoreign exchange reserve on the money supply.At last, this paper proposed some policysuggestions.Most former studies only concerned about the phase of the rapid accumulation of theforeign exchange reserve and even assumed that the foreign exchange reserve would grow ina single direction.Apparently,the background and sample data involved in this paper are morediverse because of the time lag and the ecnomic and financial upheavals.The innovation of this paper is that it analyze different phases of the impact of the accumulation of foreignexchange reserve on the money supply in a comparatively thorough manner.In the empiricalresearch, it used the non-parameter kenel analysis method to judge the time spot of differentphases,avoiding the fault of subjective judgements.As the world economy and Chinaeconomy are undergoing radical changes, the uncertainty of the accumulation of foreignexchange reserve is increasing. Basing on that context, this paper proposed some concrete andpractical advice:to realize the balance of the balance payments step by step; to improve theelasticity of the RMB exchange rate;to perfect the use of the sterilizing monetary policy tools.