The Study On The Internal Mechanism Of China’s Broad MoneySupply:2002-2012

According to the statistics of the People’s Bank of China, China’s Broad measures of money (M2) reached 97.42 trillion yuan by the end of December 2012. China has become the NO.1 nation in money stock, accounting for almost 1/4 the money supply around the world. Concerning the trillions of M2 supply, this essay tries to analyses the internal mechanism of China’s money stock from 2002 to 2012 to demonstrate the influence of funds outstanding for foreign exchange and amounts of Credit on the monetary aggregate and validated it by data. It proves that although China has a large money stock, there has been no evidence for inflation here, which the essay analyses from the aspects of the real demand, flow trends and allocation of M2. Money is like blood to the economic mechanism. The rapid growth of China’s economy not only results in the strong endogenous money demand which accounts for trillions of M2 supply, but also creates continuous demand for liquidity, brings about M2 increase and money supply expansion. Therefore, in the sound mechanism of China’s economy, how to optimize the distribution and give reasonable guidance of M2 stock, how to control and utilize the increase of M2 and how to conduct financial reform and policy direction have become the most urging task to the government.First, this essay points out that China’s money supply has its own internal mechanism. The data of China’s money supply from 2002 to 2012 proves that the Central Bank cannot control the money supply effectively because the real growth of Ml and M2 stock fail to achieve the aim of monetary policy to quite a large degree. Furthermore, via retrospectively analysis of the productivity, commodity price and money supply, it seems that Ml has little interrelationship with M2. And money supply is a method of adjustment according to the cycles of economic events. The endogeneity of the money supply exerts the influence on the foresight, effectiveness and initiative of the money policy.Secondly, the essay analyses the constitution of China’s M2 stock on the basis of the monetary statistics caliber conducted by the Central Bank. Since the implementation of reform and open policy, the rapid development of Chinese economy has brought about vigorous currency demand. Not only has the monetary aggregate demonstrated a J-shaped growth curve, but also the currency structure has experienced a magnificent change. With the creation and enrichment of credit instruments and paying methods, MO experienced a lower growth. So did the proportion of MO to M1. But Ml maintained a good momentum of growth; quasi money, namely the difference between M1 and M2 expands year over year, The reason behind the phenomenon is that fixed deposit, saving deposit and other deposit go on a rapid growth while the evident trend for current savings deposit leads to a reciprocal relationship between saving deposit and current deposit.Thirdly, based on the formula " Ms=m*B", the essay analyses the fundamental way which China’s M2 supply expanded under the influence of China’s funds outstanding for foreign exchange and bank Credit. Via comparing the data for different time periods, the essay demonstrates that to write off the influx of foreign cash, Chinese Central Bank released a large amount of basic currency from 2002 to 2008. Because of the amplification of the currency multiplier, M2 supply has been increased by several times. Although since 2008 financial crisis, funds outstanding for foreign exchange has contributed less to the increase of the money supply, China’s 4 trillion yuan economic stimulation plan has started the engine again. And from 2009 to 2012, owing to the amplification of ’credit creates currency’ mechanism, fast-growing incremental credit loan accounted for the continuous expansion in China’s M2 supply.Fourthly, based on the real demand of money supply brought about by China’s economic development, the essay analyzes the accumulation process and existing circumstances of the M2. First of all, Long-term rapid economic development results in strong endogenous money demand in China and therefore stimulates the money supply. What’s more, the immaturity of the China’s financial market and the difficulty in employing the fund raising system give rise to the over-dependence on the indirect financing and rapid growth of credit. Moreover, the limits of the fundraising approaches within the system and vigorous total social financing requirements leave the space to the fundraising methods out of the system to grow, which offer achievable supplement. However, the supplement also has its adverse effect that is the marked increase of the money stock. Furthermore, time-honored saving habit and investment-motivated model not only become the main characteristic of China’s economy, but only lead to the inevitability of the trillions of M2 supply. In fact, most of China’s M2 exists in real economy. In other word, the absorption capacity of capital market and banking system is limited.Fifthly, with regard to the trillions of M2 stock and inevitable growth brought by the economic development, this essay provides some exploratory political suggestions that the internal mechanism of money supply should carry much more weight and be taken as a guidance to adjust the money stock. Besides that, the existing money stock should be wisely guided and allocated with the purpose of preventing the excess liquidity or liquidity shortage. Thirdly, more consumption channels of money stock should be open and explored.