The Research On The Impact Of Economic Virtualization On High Monetization Rates In China

The monetization rate indicator was introduced by Mckinnon in 1973 to measure the extent to which a country has deepened financially over a while.In the past three decades,China’s monetization rate has been in the stage of high growth.Especially after the financial crisis,China’s monetization rate has increased at an abnormally high level,which makes numerous economists domestic and international worry about the problem of currency over-issuing,inflation,financial crisis,and others.At the same time,in the macroeconomic operation of China in recent years,there has been a phenomenon of “off the real to the imaginary”,compared with the long-term sluggishness of the real economy,China’s virtual economy has shown rapid development trend.On the one hand,the virtual economic sector,which is dominated by the financial and the real estate industry,has become an important pillar of China’s economic growth because of the increasing proportion of GDP in the national economy.On the other hand,the self-perpetuating trend of China’s virtual economic sector has become frequently aggravated after the financial crisis,with massive monetary funds pour into the virtual economy and idling arbitrage in it.Therefore,combining the above two important economic phenomena,this paper attempts to explore the reasons behind the high monetization rate from the perspective of excessive economic virtualization and to provide a reference basis for guiding China’s economy to better quality development,which is of great theoretical significance and practical significance.This paper first explores the monetary growth at different levels in recent years against the background of China’s high monetization rate,and in combination with the rapid development of the virtual economy sector during the same period,argues that China’s persistently high monetization rate is inextricably linked to the current economic virtualization.Next,this paper logically analyzes the influencing mechanism of economic virtualization on the high monetization rate,which is embodied in two aspects.The first is the special GDP-generating mechanism of the virtual economy.By comparing the real economy sector,it is found that the virtual economy sector can create GDP directly through money,and its creation mechanism is divorced from the process of material production,resulting in the virtual economy sector creating only a small percentage of the GDP it uses.This implies that the virtual sector is relatively inefficient in generating GDP per unit of currency.Presumably,an increment in the share of GDP generated by the virtual economy sector will inevitably lead to an increase in the monetization rate,which is supported by historical data and models.Second,the excessive development of the virtual economy has seriously hindered the transmission mechanism of monetary funds in China.In the wake of the 2008 financial crisis,the margins differential between the virtual and real sectors of the economy began to emerge.The preference for massive monetary capital flows to the virtual economic sectors,mainly the financial sector and the real estate sector,out of profitability,and short-run arbitrage within the system have led to a reduction in the money supply in the real economy,which in turn has affected the speed of money circulation throughout society.And according to the quantity theory of money,the decline of the money velocity is bound to result in additional demand for money,thus pushing up the monetization rate of China.To better validate this conclusion,this paper performed an econometric analysis by building a VAR time-series model.From the impulse response result chart,it is clear that the increase of China’s real estate loan balance,commercial bank interbank deposits,and total market value of securities market are all would have significant negative shocks to the velocity of China’s money circulation,especially drastic in the initial period.At the same time,as can be seen from the variance decomposition plot,the three variables mentioned above also have sufficient explanatory strength for the continued decline in the velocity of money circulation in China.This empirical result is in accordance with the expectations of this paper.Finally,this paper puts forward relevant policy recommendations for guide the Chinese economy to slow down the excessive virtualization more effectively,and make the fictitious economy return to the essential function of serving the substantial economy,which mainly includes the following three points:1.Optimizing bank credit flows and easing financing difficulties in the real economy.2.Perfecting financial institutions monitoring mechanism,and strictly prohibited funds idle arbitrage in the financial system.3.Strengthen the regulation and control of the real estate market to avoid over-monetization of land housing.