The Study on the Relationship Between the RMB Issuance Mode and Inflation

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Abstract： This paper focuses on the analysis and research of the root of economy problems， which is the issuance mode of RMB， and points out the trigger of domestic inflation. At the same time， it indicates the transition study on the issuance mode of RMB.

Key words： The currency issuance mode， Issuing RMB by buying foreign exchange， Inflation， Transition study

1 Introduction

The currency issuance is of great importance to a country's economy， because it is the root of the domestic economy. The goals of a domestic economy， such as， sustained and stable economic growth， adequate employment， stable price level and balance of international payments， are all on the premise of a perfect currency issuance mode. The appropriate currency issuance mode will boost domestic economy， otherwise causes negative effects on domestic economy， such as， the recession， depression， high inflation and etc. Therefore， it is necessary to figure out the relationship between the rmb issuance mode and inflation.

2 The theoretical research on inflation caused by the issuance mode of RMB

Through buying foreign exchange to issue RMB and through buying treasury bonds to issue dollar may look very similar， because both of them are take the securities as guarantee for currency issue. However， these two types of currency issuance mode are quite different in controlling the currency circulation， promoting the economic effect through currency and monetary circulation mechanism and so on.

2.1 The issuance of RMB lacks self-restraint mechanism

In international trade， in accordance with the system of exchange settlement and sales， the export enterprises will go to the central bank to exchange RMB with foreign exchange when they acquire dollars through trade， and the central bank will issue RMB in corresponding to it. However， this kind of currency issuance mode has the unlimited additional capability. The more foreign exchange assets the central bank buy， the more issuance of RMB. This is because， in international trade， when trade surplus appears， exchange rates will increase， and then the trade surplus will disappear， the international balance of payments will come true， but this is based on that the currency issuance has nothing to do with the foreign exchange. In China， we issue RMB through buying foreign exchange. After export enterprises creating foreign exchange assets by trade， the central bank will buy foreign currency by them and issue the equal valued RMB accordingly， the RMB exchange rate will stable at a low level， so the trade surplus will exist continually. Under this circumstances， enterprises have unlimited capacity to earn foreign exchange and the central bank has unlimited capacity to issue unlimited amount of RMB.

Through the above analysis， we can find that the issuance of RMB through buying foreign exchange can not control the currency circulation from the source， for it will lead to passive issuance of currency and excessive monetary circulation.

2.2 No back-flow mechanism exist when issue RMB through buying foreign exchange

2.2.1 Back-flow mechanism does exist when issue dollar through buying treasury bond

FED buys the treasury bonds issued by the U.S Treasury Department， and when the treasury bonds expire， the treasury department will pay for it by taxes. The tax is obtained from the public revenues， and public revenue comes from the benefits of economic growth which produced by the issuance of dollar. Therefore， the dollar circulation is limited when issue it by buying treasury bonds. Besides， by the time the securities due to repay， the supply of currency will be corresponding quit from circulation， just like figure 1.

2.2.2 No back-flow mechanism exist when issue RMB through buying foreign exchange

As shown in figure 2， there is no back-flow mechanism when issue RMB through buying foreign exchange， namely， once the RMB released into the market circulation， it is hard to quit. The most important reason is that China's RMB issuance mode is not associated with its government， it can not make the RMB withdrawn from the market by means of taxation， just like the way the dollar does. The issuance of RMB lies in the existence of trade surplus and the system of exchange settlement and sales. Based on this， the central bank issue RMB through buying foreign currency， and only through trade deficit can RMB take out of circulation. However， in China， the appreciation of RMB can not reach the designated position because the governme-

nt controls exchange rate. Therefore， we experienced the trade surplus from 1994 to now， which made great negative impact on China's eco-

nomy.

2.3 Issuing too much RMB through buying foreign exchange will cause inflation

According to monetarism inflation theory， the amount of goods and the amount of money should be compatible. The way of issuing RMB through buying foreign exchange， using export commodities to exchange for foreign currencies， and then using foreign currencies to exchange for RMB， will cause the issuance of RMB increase and the amount of goods decrease. As a result， the inflation will certainly hap-

pen with too much currency corresponding too few goods.