Chinese Interest Rate Marketization And The Currency Issue Of RMB

China should issue RMB in the way of buying treasury bonds insteadof foreign currency so that money supply and money demand could returnto a regular status. So that would lead the interest rate system to thegeneral equilibrium state where stable spreads are maintained betweensubmarkets. Central bank could use open market operations to influencethe benchmark interest rate directly in order to change the interest ratelevel.Interest rate reforms were different in the U.S.A. and Taiwan becausewe start differently with them. They issue currency by buying treasurybonds or central bank CDs. After the interest rate liberalization, benchmarkinterest rate will be changed when open market operations occur. Inmainland China we are in another situation. The relation between moneysupply and the interest rate is cut off. The benchmark interest rate does notguide the interest rate system. Thus if deregulation, the interest rate systemcould lose control. It would be a big blow to the economy.So the key point of Chinese interest rate reform is to change thecurrency issue, to buy treasury bonds instead of foreign currency, to solvethe abnormal performance of money supply and money demand and toform general equilibrium in the market.The article starts from the Walrasian general equilibrium. Under thegeneral equilibrium, the interest rate system is driven by the benchmarkinterest rate. The article points out that the establishment of such aninterest rate transmission mechanism is the precondition and guarantee ofthe success of the interest rate reform. And then, comparing to the historyof the interest rate reform of the U.S.A. and Taiwan, the article dissertate exhaustively the requirement of a change in currency issue otherwise theinterest rate reform would not succeed.