(1) A surplus of currency
The People’s Bank of China implemented a number of loose monetary measures in an effort to offset the effects of the Asian financial crisis on the economic growth of my nation, but the outcomes were far from satisfactory. A long-term money supply surplus occurred as a result of “deflation under loose monetary policies.” Money supply growth in my country was significantly faster between 1998 and 2005 than the combined rates of pricing and GDP growth.
(2) The loan-to-deposit ratio in the banking sector is still growing.
Since the most recent cycle of macro-control in 2003, the growth rate of financial institutions’ loan balances has been steadily less than the growth rate of their deposit balances, and the difference between the two has widened, revealing clear deviations. Loan balance growth slowed down further, banking institutions’ deposit gaps widened, and the loan-to-deposit ratio fell precipitously. For every 100 yuan of deposits that commercial banks accepted in 2005, only around 53 yuan were turned into loans for the actual economy, leaving almost half of the money stuck in the financial system for internal circulation.
(3) Abundant reserves are still present.
The banking sector can only deposit excess liquidity with the central bank in the form of excess reserves due to an excess of monetary liquidity. With an average annual growth rate of 32.9 percent, excess reserves expanded from 400 billion yuan at the end of 2000 to 1,265 billion yuan at the end of 2004. The surplus reserves that the People’s Bank of China placed in financial institutions increased rather than decreased in March 2005, despite a 0.63 percentage point reduction in the excess reserve ratio. The amount reached a high of more than 1,260 billion yuan at the end of September. The surplus reserve ratio across all financial institutions reached 4.17 percent by the end of 2005.
(4) Money market interest rates went on a downward trend.
A significant inflow of funds into the money market and bond market, which results in a sustained decrease in money market interest rates, is a direct effect of excessive market liquidity. owing to an abundance of finances since 2005. The market yield and issuance and transaction interest rates in the interbank market both continued to decrease.
Reasons for Liquidity
Globally speaking, the Federal Reserve and the Bank of Japan have maintained loose monetary policies since 2001, which has led to significant cross-border flows of global funds, with a sizable portion of those flows going to rising countries like China. This is the external cause of excess liquidity; from the internal environment of China’s economic operation, excess liquidity in my nation has a peculiar formation mechanism that is intimately linked to the distinctive financial system and market environment.
higher foreign exchange rates
The current account and capital accounts of my country are currently in “double surplus” status, and the market has been expecting the RMB to appreciate since the second half of 2002, which has resulted in a significant influx of foreign arbitrage money and an expansion of foreign currency reserves. The whole sum is the highest in the entire planet. The constant and significant growth of foreign exchange reserves will directly result in the ongoing expansion of the size of foreign exchange funds under the compulsory foreign exchange settlement and sales system.
Unreasonable structure for saving and investing
A very visible economic characteristic in our nation is the high savings rate. High investment rates are supported by excessive savings rates among firms and residents. Additionally, the banking sector in China only produces a single product altogether, the intermediate market is incredibly underdeveloped, and there is still a significant quantity of money in savings accounts. The interaction and coupling of supply and demand pressures finally appears as excess macroliquidity, which translates into strong growth in credit and investment. As a result, the external financing of Chinese firms is heavily dependent on bank loans.
scarce financial asset supply
The current surplus liquidity in my nation is distinct from the current excess liquidity around the world, which is mostly seen as an excess liquidity in the banking system. This is due in large part to the fact that there are very few financial assets available, there is a severe shortage of supply, and there is no other method to obtain money.