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A Study on the Causes and Solutions of Excess Liquidity in Chinese Economy

Author: YangXiaoHong
Tutor: LiZiBai
School: Xiamen University
Course: Finance
Keywords: Liquidity Excess Liquidity Macro Control
CLC: F224
Type: Master's thesis
Year: 2008
Downloads: 203
Quote: 1
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Abstract


Excess Liquidity has become a prominent problem in Chinese economical operation. In recent years, although People’s Bank of China （PBC） has raised bank reserve requirements frequently to recover excess liquidity, the action cannot tackle the root cause. So the causes of excess liquidity problem should be analyzed deeply, furthermore the corresponding solutions should be proposed.To begin with, this paper reviews the conception of liquidity and excess liquidity, which build the research platform for the postamble. After that, the conclusion that the excess liquidity has happened in china in recent years can be drawn by calculating and analyzing two indexes: excess money （EM） and M2/GDP.In the analysis of reasons of appreciation of the RMB, the paper first focuses on the changes of international economic environment, and then on Chinese situation. One hand, in the situation of global excess liquidity, the long-term and steady development of Chinese economy and the steady and small step appreciation of RMB attract the inflow of large amounts of venture capital. Meanwhile, the long-term economic growth mode of export- orient and over- reliance on overseas demand and the investment mode which is characterized by encouraging foreign direct investment （FDI） cause the double surplus on china’s balance of payment. As a result, on the function of Mandatory foreign exchange settlement and sales, double surplus make vigorous growth of foreign exchange reserve and Purchase of Foreign Exchanges. On the other hand, the unreasonable distribution pattern of national income makes high savings and low consumption. The insufficient domestic demand forces Chinese government to increase government investment continuously and also makes Chinese economy more depend on foreign trade, which strengthen the economic development mode stimulated by investment and export. However, high investment and low consumption cause overcapacity, make the export grow faster, aggravate the unbalance of Chinese balance of payment.On the basis of the above discussion, to constrain the excess liquidity, all kinds of macro control policy should be used by multilateral organizations. First, the tight monetary policy can be insisted, but the utilizations of tools of monetary policy should be improved, for example, improving the reserves against deposit system, Open-Market Operations should be changed into treasury bond market operations and so on. Second, fiscal policy should be expanded flexibly. Besides accelerating the transformation to public finance, fiscal policy should take emphasis on improving individual income tax system, adjusting export tax drawback policy and Import and Export Duty rates, fully displaying the role of fiscal policies in optimizing the structure. Third, the trade policies and exchange rate policies should be adjust timely and moderately. The export-oriented trade policies should be changed the utilizations of foreign funds should be transformed from attracting investments to choosing investments. Last, in terms of exchange rate policies, the pricing mechanism of RMB exchange rate should be further improved.

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CLC: > Economic > Economic planning and management > Economic calculation, economic and mathematical methods > Economic and mathematical methods
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