Excess liquidity is a complex monetary and financial phenomenon, but it is not entirely a financial problem.

1. Excess liquidity measured by money supply

In order to evaluate the degree of excess liquidity fairly, it is necessary to distinguish between normal liquidity and excess liquidity. Since the third quarter of 2005, the growth rate of broad money M is obviously higher than the predicted growth rate, with a difference of about 300 billion yuan. This part of the money supply is the increment after considering normal liquidity, that is, the trend growth rate of the money supply, which can be regarded as excess liquidity. From the historical average level, since 2004, the growth rate of broad money supply is basically lower than the average level since 1995. In this sense, although there is a certain degree of excess liquidity in China at present, it does not mean that the problem of excess liquidity in reality is very serious.

2. Use bank deposits and loans to measure excess liquidity.

Judging the degree of excess liquidity from the perspective of bank deposits and loans, we can get basically the same conclusion. It is predicted that the loan growth rate in recent years is between its own trend forecast and GDP regression forecast, indicating that the loan growth is basically normal. The excess liquidity of banks is not caused by the reduction of loans, but by the excess supply of funds closely related to the money supply.

3. Considering the central bank's hedging maturity factor, the potential excess liquidity pressure increases.

In recent years, the central bank continuously issued a large number of central bank bills to hedge liquidity: at the same time, the reserve ratio was used several times to freeze liquidity, which made some funds not show real excess liquidity. For example, in 2006, although the central bank's bill circulation has reached 3.65 trillion, and the cumulative repurchase is 1.99 trillion, the total amount of funds returned from the open market has reached 5.7 trillion. In the first quarter of 2007, the central bank's bill circulation has reached 1.82 trillion yuan, which is close to 50% of the total circulation last year. By the end of March, the balance of central bank bills had reached 3.9 trillion yuan. However, due to the continuous issuance of a large number of central bank bills to hedge liquidity in recent years, with the increase in the number of hedges, the term of central bank bills is getting longer and longer, and the interest rate is getting higher and higher, making it more and more difficult. The effect of offsetting the hedging effect of some expired central bank bills gradually began to appear. With the further narrowing of hedging space, some potential liquidity may be transformed into real liquidity.

In fact, under the current situation that the central bank can effectively hedge, although the potential excess liquidity pressure is great, the actual excess liquidity is still within the controllable range, that is, the scale of about 300-400 billion yuan. If some potential liquidity can be transformed into real liquidity, the scale of excess liquidity is about 0.3-3 trillion yuan. The potential excess liquidity pressure is more prominent than the actual excess liquidity problem.

Second, the reasons for China's excess liquidity and its relationship with international liquidity

1. The global excess liquidity and the relatively lagging reform of China's exchange rate and foreign exchange management system are the direct reasons for the current excess liquidity.

On the surface, the current excess liquidity in China is mainly caused by currency and exchange rate. In a sense, the change of external value of national currency lags behind the improvement of economic strength in the process of economic development, which leads to the imbalance of domestic and international economy. In fact, the monetary factors that lead to China's current excess liquidity include: loose monetary policy in developed countries leads to global excess liquidity, and then a large number of international hot money (hot money) exists; China's relatively undervalued exchange rate leads to arbitrage opportunities in China; and China's foreign exchange management system leads to an increase in the central bank's base money supply. Among them, global excess liquidity is a necessary condition, but not a sufficient condition. If there is no arbitrage space in China, foreign liquidity will enter China, but it may enter at an average level or at a low level. In a sense, arbitrage opportunities caused by factors such as undervalued exchange rate are the key conditions that directly lead to overseas liquidity entering China. Even if there is no obvious excess liquidity abroad, as long as there are obvious arbitrage opportunities, a large number of international hot money will still enter China, of course, its scale is obviously smaller.

(1) Global excess liquidity is an important external factor for the rapid increase of liquidity in China. For a period of time, major developed countries, which are dominant in the international financial system, have implemented relatively loose monetary and fiscal policies to meet the needs of deflation and international counter-terrorism, resulting in abundant global liquidity. It not only causes the imbalance of global trade balance, but also leads to the sharp rise of commodity prices in the international market. Trade surplus, direct investment and international hot money constitute the main ways for international liquidity to enter China. With the increase of China's trade surplus and the expectation of RMB exchange rate appreciation brought by the surplus, international capital continues to be optimistic about China, and international hot money flows into China through various channels.

(2) Undervaluation of exchange rate, low asset prices and obvious arbitrage opportunities provided by expected factors are the key factors for foreign liquidity to enter China. Under the condition of international excess liquidity, a country's excess liquidity is absolute in a certain sense. In the absence of obvious international excess liquidity, the excess liquidity arising from the international transfer of liquidity in a country can be called relative excess liquidity. At present, because the undervalued exchange rate, depressed asset prices and expected factors provide obvious arbitrage opportunities, a large number of foreign excess liquidity enters, both absolute excess liquidity and relative excess liquidity.

(3) The foreign exchange management system that came into being during the period of foreign exchange shortage and continues to this day, that is, the foreign exchange settlement and sale system, is an important institutional reason for the excess liquidity. Although the foreign exchange settlement and sale system has been relaxed, it is difficult to produce the due effect under the expectation of appreciation, and it still operates in an "inertia" way, which makes the trade surplus turn into the domestic money supply surplus.

2. High savings rate and export-oriented model are the basis and root of excess liquidity.

From the deep-seated reasons, the current excess liquidity in China is an inevitable problem when the investment-driven economic growth model supported by "high savings-low consumption" develops to a certain stage intentionally or unintentionally, that is, the internal imbalance pressure brought by the "high savings rate" model is released through preferential policies and low-cost export-oriented strategy supported by cheap resources and environment.

(1) High savings rate is the long-term basis and important background factor of excess liquidity. Of course, countries with low savings rates may also have excess liquidity, while countries with high savings rates may not necessarily have excess liquidity. In the case of a serious shortage of capital elements in the early stage of economic development, high savings is very necessary to solve the capital gap. This is often an important reason for many countries to increase their savings rate in the process of economic development, especially when implementing the catch-up strategy. With the development of a country's economy and the change of the relationship between capital supply and demand, the imbalance between domestic investment and consumption caused by high savings rate may lead to realistic excess liquidity. China's financial system is not perfect. Since the mid-1990s, the change of capital supply and demand and the accumulation of capital can not be transformed into capital investment in time. Excess funds caused by high savings often appear in the form of banks' cautious reluctance to lend, and there is a certain degree of capital flight tendency. Because China is still in the development stage of commodity export, and the country has implemented foreign exchange control for a long time, the relatively surplus domestic funds can neither be effectively converted into capital nor flow out in time. Under the joint action of various factors, the change of capital supply and demand is not in the form of liquidity, but in the form of overcapacity. Therefore, the solution to the domestic capital supply and demand situation, especially the way out of overcapacity, naturally falls on foreign trade exports.

(2) Preferential policies and low-cost export-oriented mode supported by cheap resources and environment are the direct factors that lead to excess liquidity in the real economy, especially in international trade. Since 1998, facing the pressure of domestic demand and the external impact of the East Asian crisis, China has actively participated in the international division of labor and embarked on an "export-oriented" development strategic model supported by preferential policies and cheap resources and environment. Therefore, the imbalance between domestic investment and consumption under the high savings rate is transformed into the imbalance of foreign trade import and export to a certain extent. Through the trade surplus and foreign exchange reserves, liquidity is finally manifested in the way of "exporting to domestic sales". Because when internal problems such as high savings rate and overcapacity are solved by external means, it is necessary to underestimate the exchange rate. If the local currency does not appreciate, the problem of excess liquidity is inevitable and may lead to inflation. If the local currency chooses to appreciate, it may hit domestic low-cost industries, make the balance of payments deficit, fall into a liquidity trap, and lead to deflation. It should be said that developing export-oriented economy is an inevitable choice for China's economic development, but any development strategy model and policy orientation has its adaptation period and conditions. Because the change of the external value of RMB lags behind the improvement of economic strength, and the internal and external economies are unbalanced, what China is facing now is the excess liquidity caused by its previous choice not to appreciate.

3. The reform of state-owned banks, financial innovation and the imbalance of regional financial development have also amplified the degree of excess liquidity to some extent.

(1) The reform of state-owned banks and listing financing are short-term factors that highlight the liquidity problem. On the one hand, driven by capital adequacy requirements and other factors, the change in the use of bank funds in the process of bank reform has led to a relative decline in the growth rate of loans, and the loan-to-deposit ratio of banks has shown an obvious downward trend; On the other hand, the loanable funds of state-owned banks has increased rapidly in the short term through restructuring and listing, which has also increased the excess liquidity in a certain period and to a certain extent.

(2) The imbalance of financial development between urban and rural areas and between regions has amplified the degree of domestic excess liquidity. With the reform of state-owned banks, there have been phenomena such as the merger of branches in rural areas and central and western regions and the decline in loan scale. Through internal fund dispatching and inter-bank market business, banks gather funds from large and medium-sized cities, especially the developed eastern coastal areas, resulting in the shortage of funds in rural areas, the west and small and medium-sized enterprises and the surplus of funds in the southeast coastal and export-oriented economies. These factors lead to excess liquidity in some areas, and to a certain extent, have amplified the excess liquidity in China.

(3) Domestic financial innovation has aggravated the excess liquidity to some extent. With the development of domestic financial market and the acceleration of financial innovation, deposits such as insurance, guarantee, futures and social security funds are invested in bonds and stocks through various channels, which makes these currencies that are not included in the broad monetary scope transform into quasi-currencies, and also intensifies the excess liquidity to some extent.

Third, the development trend, possible impact and potential harm of excess liquidity in China.

1. Excess liquidity may be a phased phenomenon.

Judging from various factors that lead to excess liquidity, except for short-term financing, others are basically medium-and long-term factors. The high savings rate is a remarkable feature of China's economy and even East Asia's economy, which cannot be completely changed in the short term or even in the medium term. Although the process of raising interest rates in developed countries will have a certain tightening effect, loose monetary policy will lead to excess global liquidity and a large influx of international hot money, which will last for a certain period of time. If arbitrage opportunities continue to exist, China's excess liquidity will continue through various channels in anticipation of further appreciation of RMB. After the restructuring, the change of the capital utilization mode of state-owned banks will become the norm, and the imbalance of regional financial development will not be solved in the short term, which will continue to aggravate the excess liquidity.

Judging from various factors that may restrain excess liquidity, it is a long and slow process to expand consumption and reduce savings, and the reform of exchange rate system is also a medium and long-term process. Although the system of foreign exchange settlement and sale is slowly changing, it will not change fundamentally in the short term, and the appreciation of RMB is expected to offset the effect of the change of foreign exchange settlement and sale system in a certain sense. Because it is impossible to adopt a one-step appreciation method at present, the relatively undervalued exchange rate leads to arbitrage opportunities in China, and the expectation of further appreciation of the renminbi still exists.

2. The adverse effects of excess liquidity

Passive money supply and excess liquidity not only reduce the autonomy of monetary policy, but also affect the means and effects of macro-control. It will also have a negative impact on economic development.

(1) Price shock-causing inflation or a sharp rise in asset prices. Under normal circumstances, the abundant money supply and excess liquidity will be directly reflected in the changes in the price level. Due to the change of China's development stage and the influence of consumption upgrading factors, the shortage economy has ended, and it has now developed into the stage of industrial consumer goods with relatively large supply elasticity, resulting in the oversupply of money and excess liquidity having relatively little impact on the price level of consumer goods, but greater impact on asset prices. Since last year, China's consumer price index has risen to a certain extent, but it is basically within the normal fluctuation range, while the prices of housing, stocks and other assets have continued to rise rapidly. As the problem of excess liquidity continues, the upward trend of price level will continue.

(2) Credit expansion may lead to investment expansion. The abundant bank loanable funds leads to a relaxed credit environment, which may continue the rapid growth of fixed assets investment and form the pressure of macroeconomic overheating.

(3) It may impact the stability of the banking system. First, the loanable funds of the banking system has increased too much, and the interest rate risk has increased. Second, the "bubble" caused by the rising prices of real estate and other assets is a potential factor to induce systemic risks. Third, the rapid increase in credit supply may increase the credit risk if the economic situation reverses.

(4) Increase the vulnerability of export-oriented economy with export and foreign capital as the mainstay. Excess global liquidity not only directly leads to excess domestic liquidity, but also leads to an increase in the prices of commodities such as international market resources, which may have a certain adverse impact on China's macro-economy and medium-and long-term economic development, further aggravating the vulnerability of export-oriented economy dominated by exports and foreign capital.

3. The possible beneficial effects of excess liquidity

(1) is conducive to the development of the capital market and direct financing. And the "going out" strategy. Excess liquidity is manifested in the following aspects: banks have abundant loanable funds, but relatively few loans, and the role of banks in the financing system has reached a certain limit, which requires further improving the relatively relaxed capital environment for the proportion of stocks, bonds and equity investments, which can provide favorable conditions for the development of capital markets and direct financing; At the same time, it is also conducive to expanding overseas investment and accelerating the transformation from simple commodity export to commodity capital export.

(2) It is conducive to slowing down the excessive dependence on the export-oriented economy, slowing down a series of adverse effects brought about by it, and promoting the structural balance between urban and rural areas and regions. In a sense, excess liquidity is a signal that market forces demand compulsory adjustment of low-cost growth mode under the background of high savings, which will play a positive guiding role in China's economic growth mode and development mode, help to change the adverse effects of excessive dependence on foreign trade departments and excessive concentration of resources on central and western regions, small and medium-sized enterprises and domestic consumption, and promote the transformation of growth mode and the adjustment and optimization of economic structure.

Fourth, the countermeasures and suggestions to solve the excess liquidity.

To solve the problem of excess liquidity, we should start with the system and mechanism. Combine long-term and short-term measures, treat both the symptoms and root causes, comprehensively apply fiscal, monetary, industrial and trade policies, and promote short-,medium-and long-term measures at the same time.

1. Short-term countermeasures:

-Further adjust export-oriented policies, optimize export structure, effectively manage export growth, and resolutely limit low-cost exports at the expense of resources and environment. By appropriately restraining the rapid growth of exports, we will reduce the passive increase of the base currency caused by the inflow of foreign exchange caused by the trade surplus.

-curbing the rapid growth of foreign exchange reserves. Reform the foreign exchange management system and effectively reduce the passive placement of the base currency caused by foreign exchange holdings. Reforming the foreign exchange settlement and sale system and cutting off the linkage between the growth of foreign exchange reserves and the increase of base currency will alleviate the excess liquidity to some extent.

-steadily push forward the adjustment of RMB exchange rate and stabilize exchange rate expectations. By adjusting the exchange rate, we can curb the massive inflow of international hot money, reduce the imbalance of international payments, and also slow down the increase of liquidity.

-Reform the interest rate formation mechanism and gradually relax the management of benchmark interest rates for deposits and loans.

2. Long-term measures:

To solve the problem fundamentally, on the one hand, we should speed up the reform of economic system and create a more ideal institutional environment for economic development; On the other hand, we should vigorously promote economic restructuring and the transformation of growth mode.

-Accelerate the construction of the social security system, weaken the residents' precautionary saving motivation, and create the necessary institutional conditions for gradually increasing the consumption rate and changing the "high saving". High savings rate is the characteristic of East Asian economy, and its common reason lies in the imperfect social system environment in East Asia, and residents generally lack long-term stable expectations. The social environment in China is stable. If the social security system is gradually improved, the pressure of "high savings" will gradually weaken.

-Vigorously develop direct financing, especially an innovative financial system conducive to structural adjustment and the transformation of growth mode. The relatively backward development of the capital market is an important reason for the concentration of liquidity in the banking system, the imbalance of bank deposits and loans, and the excess liquidity. We should take advantage of abundant liquidity, accelerate the pace of structural adjustment, and develop innovative financial systems such as venture capital with the change of growth mode.

-Promote balanced development between urban and rural areas and regions, and change the excessive concentration of capital and other resources in cities, developed eastern regions and tradable sectors, and the resulting imbalance between investment and consumption and regional development. Accelerate financial innovation in underdeveloped areas and rural areas in line with national regional policies and fiscal policies in major functional areas.

-Further accelerate the "going global" pace of China enterprises, expand China's overseas investment, and promote the transformation from commodity export to capital export. It is necessary to further increase the pace of going abroad, change the current situation of "double surplus" in capital and current account, and eliminate the basis of excess liquidity.

3. Monetary policy suggestions under the background of excess liquidity

Excess liquidity poses a severe challenge to monetary policy. In this case, the choice of monetary policy objectives and tools needs to be extra cautious.

-Explore the intermediate goal of increasing monetary policy. In the case of excess liquidity, not only the effectiveness of the money supply target is affected, but also the effectiveness of the interest rate index. When the consumer price index is basically stable and the asset price changes greatly, the money market interest rate can be regarded as an intermediate target besides the supply target, and it is necessary to increase the observation of the asset price index besides the consumer price index.

-prudently choose to use monetary policy tools. As interest rate adjustment will expand arbitrage space, it may attract more short-term capital inflows and increase excess liquidity. Therefore, in the choice of monetary policy tools, we should minimize the direct use of interest rate tools and use more reserve ratio tools and open market tools. When using interest rate instruments as a last resort, corresponding hedging arrangements should be made to reduce the possible negative impact.