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Central Bank: China does not have the problem of the so-called currency distribution rights

  • Source:China Securities Network
  • Release on :2019-03-02
The Party Branch Theory Learning Center of the General Office of the People's Bank of China recently wrote an article in China Finance. It is said that because the RMB base currency issuance is linked to the inflow of US dollar funds and the increase in foreign exchange reserves, China's credit expansion is subject to the US dollar. The fall of monetary sovereignty is the main cause of economic and financial difficulties.

The article emphasizes that China has always controlled the issuance of the renminbi. There were no external pressures and forced to sell monetary sovereignty around 2003. There is no such problem as the so-called currency distribution rights.

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The article points out that in the issue of the issuance of the base currency, the sovereignty of a country's currency is also reflected in the independent choice of the currency issuance method, rather than a specific distribution method. Some countries or regions choose to take the initiative to sell part of the currency sovereignty for their own overall interests. For example, countries in the euro zone cancel their sovereign currency and use the euro in a unified manner. The currency issuance rights are uniformly implemented by the European Central Bank; Hong Kong has implemented a linked exchange rate system, and the issuance of Hong Kong dollars and interest rates are basically pegged to the US dollar. These are the result of active choices, aiming at maximizing the interests of the country and the region, which is different from the monetary sovereignty in the typical sense.

The article believes that the issuance of the RMB base currency since 2003 is an active choice based on the actual needs of economic development, and has always served the overall interests of the country and achieved significant results.

First, the issuance of basic currencies has always been subject to the overall situation of national reform and development. Since the second half of 2002, China's economy has shaken off the impact of the Asian financial crisis and started a new cycle of rising cycles. The current account and capital projects have shown a sustained “double surplus” pattern, the dollar inflow has increased correspondingly, and the demand for US dollars to exchange RMB in the foreign exchange market. A significant increase. At this time, if the market supply and demand is left to decide, the RMB exchange rate will appreciate rapidly and sharply, which will have an impact on China's export growth and attracting foreign investment. In order to seek adjustment time for export-oriented enterprises and extend China's strategic opportunity period, the People's Bank of China continued to buy US dollars in the foreign exchange market and spit out the corresponding RMB base currency, realizing the active, gradual and controllable appreciation of the RMB exchange rate. In the process, the United States constantly pressured China to demand a faster appreciation of the renminbi. In this context, the People's Bank of China insists on the basis, content and timing of the introduction of the base currency and exchange rate reform in accordance with the needs of domestic reform and development, which reflects China's firm grasp of monetary sovereignty.

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Second, the purchase of foreign exchange to the base currency did not lead to excessive credit expansion in China. While purchasing the US dollar and spitting out the renminbi, the People's Bank of China has frozen or recycled a portion of the passively placed renminbi base currency by raising the deposit reserve ratio and issuing central bank bills, so that the growth of money and credit needs to be basically adapted to the needs of the country's economic development. For example, in 2003-2012, although the average annual growth of foreign exchange reserves was nearly 40%, the average growth of M2 was still controlled at around 17%. In particular, in the period of 2003-2007, when the foreign exchange reserves accumulated rapidly, the People's Bank of China raised the deposit reserve ratio 15 times and hedged about 80% of the liquidity of foreign exchange. In 2011, the People's Bank of China introduced a dynamic adjustment mechanism for differential deposit reserves to strengthen macro-prudential management. The growth rate of RMB loans gradually returned to normal from the high level during the international financial crisis and remained stable. The growth rate of M2 also corresponds to 19.7% at the end of 2010. It fell back to 13.3% at the end of 2015, and by the end of December 2018, it dropped further to 8.1%. To a large extent, the independence of monetary sovereignty is ensured.

Third, exchange rate reform has effectively expanded the monetary policy autonomy. According to the "impossible triangle" theory, in an open economy, increasing exchange rate flexibility can increase the autonomy of monetary policy. In the face of the trend of changes in the foreign exchange market, the People's Bank of China adhered to the market-oriented orientation, initiated the reform of the RMB exchange rate formation mechanism in July 2005, and actively decoupled from the US dollar. In the 12 years, the RMB appreciated against the US dollar by 25%. The daily floating range gradually expanded to 2%, while gradually withdrawing from the normalization intervention, and the RMB exchange rate against the US dollar was two-way. Thanks to the smooth progress of the “exchange reform”, China’s monetary policy regulation framework has gradually shifted from quantitative to price-based, and the monetary policy and tool system has been continuously enriched and improved. The initiative has improved significantly.

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Fourth, monetary policy has effectively promoted the leap-forward development of China's economy and finance. The decade of 2003-2013 is the decade in which the People's Bank of China purchases the most foreign exchange. It is also a period in which China's economic and financial development is significantly better than that of major developed countries and other emerging economies, proving that monetary policy is generally successful. At the economic level, China's economic growth has exceeded 10% annually, and GDP has increased from 13.74 trillion yuan in 2003 to 59.52 trillion yuan in 2013. It has risen from sixth place to second place in the world, while prices are relatively stable. Employment has grown steadily and the balance of payments has become more balanced. At the financial level, the comprehensive strength of the financial industry has significantly increased, successfully resisting the impact of the 2008 international financial crisis and its deepening impact. Financial institutions entered the list of global systemically important financial institutions for the first time, and the size of the capital market ranked second in the world.

The article said that since 2014, with the slowdown in foreign exchange inflows and even the pressure of foreign exchange outflows, the People's Bank of China has basically stopped investing in the RMB base currency by purchasing US dollars. At this time, the economic growth rate has slowed down. This also shows that it is unfounded to believe that the issuance of the RMB base currency by the purchase of the US dollar is the main cause of the current economic and financial difficulties.