Excess liquidity facing the experience of Japan and China's choice

 The face of excess liquidity: Japan's experience with the choice of Chinese Institute of World Economy, Fudan University
Hua Min
from international experience, in an open economy, most of the excess liquidity from external shocks, namely, in the short term the situation of rapid increase of reserves. RESERVES nothing more than the increase in channels: trade continued under the current account surplus; and under the capital investment, but also the continuing short-term speculative capital inflows. With the increase in reserves came Nature is the central bank balance sheet assets items increases. when the central bank sterilized limited means, in order to maintain the balance of assets and liabilities of the central bank, only to increase the money supply. as long as the money supply exceeds the demand for money the whole society, then flow will occur the problem of excess.
the face of excess liquidity, government authorities often what control measures will be taken? We first look at how to solve Japan's problem of excess liquidity. Japan in World War II After the emergence of a situation of rapid economic growth, along with rapid economic growth comes an increase in exports and the rapid growth of foreign exchange reserves. For the period of rapid economic growth in Japan Why does the phenomenon of rapid growth of exports, which probably can be identified as economic A take-off law. because in the economic take-off phase, a common phenomenon is the production of traditional self-sufficiency would be replaced by mass production, which must be exported to find with this kind of large-scale production that can match the consumption market, therefore, export-oriented economic take-off almost all countries a choice can not be replaced. Since large-scale exports in the period of economic take-off is inevitable, then the reserves with economic growth and the increase of exports is not on the same Avoid things.
Obviously, increasing in Japan, behind the reserve must be a trade deficit the United States and Europe, so, in terms of increasing upward pressure on the reserve both, or from the United States and Europe and Japan in order to recover trade balance is concerned, the yen appreciation is bound to happen. Therefore, the 1985 In theory, or from the practice, however, even in a country's decision to make after the currency appreciation, it is impossible to take sharp appreciation in the short term approach, because a substantial appreciation of the fundamentals because of the seriousness of the financial side and the resulting departure from the economic crisis Therefore, almost all decisions in a country where the currency appreciation, we can see the exchange rate is always expressed as a process, which is what led to the expected appreciation of the reason. In order to prevent the temptation of the expected appreciation occurs over the short term more speculative arbitrage inflows arising from a greater appreciation of the currency pressure, the decision of the yen appreciation, the Japanese government authorities while the appreciation of the practice of taking the lower interest rates to hedge because of the appreciation of yen assets arising from other International monetary assets yield variance. While such an approach can be taken to check the inflow of international speculative capital led to increased mobility, but the interest-rate cuts will inevitably result in the increase of the source of the money supply caused by increased mobility. Thus, we can not escape encountered a paradox: whether to raise interest rates increase the appreciation of the policy mix, or the combination of the appreciation of Canada's policy rate cut, liquidity increases are inevitable, the difference only lies in the money supply increased, thus the domestic What is the increased mobility of international capital flows that exogenous factors, or because the domestic money supply to increase the endogenous factors that caused.
Japanese culture is quite Charity begins at the characteristic field Therefore, in order to prevent international capital share the fruits of economic growth in Japan, the Japanese government authorities in the yen, while the decision will certainly choose the currency policies and measures to balance the cut, including the central bank and commercial banks, balance sheet, so took place on the mobility of endogenous creation process. There is no doubt that prices of traded goods in the international competition because of the performance of the exogenous circumstances, or because the country is a big country and the students (if their is a big country, then trade endogenous goods prices, but because of large-scale production in the country is relatively small economies much more, so the price of tradable goods in the case of students, the tendency will only continue to decline occurred, rather than the reverse) situation, either the price of traded goods remain unchanged, or that the phenomenon of sustained decline, so that in case of excess liquidity, the excess money supply to enter the asset market arbitrage will be a result of the economic bubble. bubble still has the original the function of stimulating economic growth, but when the bubble is not sustainable development to the time when asset prices is a serious departure from economic fundamentals, and liquidity supply can not keep up the speed of asset prices occurs when the bubble burst in economic growth caused the crisis suspension. from the 1985 Plaza Accord in 1989 the Japanese economic bubble burst and the stagnation of economic growth, only about five years less than the time, Japan as the currency appreciation and excess liquidity, there is a boom-recession the development process.
facing China today began the same problem with the Japanese, and more serious in a lower income level than the case of Japan took place, so the slightest mistake, it is possible to re- dance mistakes caused by the Japanese crisis of China's economic growth. is because of China's income level is much lower than in Japan, so China in the event of such a crisis, its consequences will be more serious. In order to prevent such a crisis, the Chinese government In determining the revaluation the same time, Japan has taken a different approach, that is, while the appreciation of the renminbi and the Japanese adopted the opposite policy of raising interest rates. There are many observers and analysts have accordingly concluded that the Chinese Therefore, to avoid the Japanese economic bubble, and this may have caused the financial crisis and economic recession.
But, as in our previous paper, the analysis pointed out that in the case of currency appreciation, whether it is taken policy of raising interest rates or interest rates, increased liquidity for the control are of no avail, the difference lies only in whether the increase in mobility of endogenous or exogenous. So, we should not naively think that as long as we take a different Japan policy mix, we can solve the problems Japan has faced. In our view, in order to prevent or solve the liquidity crisis and the impact of the bubble, there are only two options: first, from the beginning to unswervingly implement the currency does not appreciate policy; second, through structural reforms, with the adjustment of current account to balance its current account surplus caused by the increased mobility.
closer look at the situation in Japan was the situation facing China today, we can easily find , both in Japan 20 years ago, or today's China, in fact, have the opportunity to avoid the excess liquidity arising from the impact. If Japan can follow the original requirements of the United States and Europe, opening up domestic financial markets, services markets and agricultural market, then by the Japanese have the opportunity to bargain to maintain a stable exchange rate of leaving the money supply has been effectively controlled. just because by returning to the above three sectors strong opposition from vested interests, the Japanese authorities did wrong selected to the cost of the currency appreciation, protection of the three departments to implement the strategy. Thus, a country in the face of external economic shocks case, what is important is the country's long-term or short-term interests of the vested interests weight, will have a different policy responses, resulting in a completely different policy effects. learn from Japan's experience, we believe that China should let its currency as soon as controlling the so-called market forces in the continuing appreciation of the role of the momentum turned back to the original moderate up the fixed exchange rate, at the same time as soon as possible to improve the degree of trade liberalization and structural reforms to seize the opportunity to reduce China's dependence on foreign trade for economic growth. If not adopt such a policy mix, then China and Japan will go over the same road, along the increasing mobility and the path of the bubble economy has burst a bubble burst to the surplus liquidity crisis, that is, the wealth of Chinese residents fully engulfed in cash so far. the history of the outbreak in 1929 great crisis, Japan's bubble crisis in 1989, and the Southeast Asian crisis of 1997 through a crisis like the elimination of excess liquidity out of. Spare the rod, spoil the child.