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Chapter 29 Central banks: the "nerve centers" of the financial system (4)
2.8. On August 15, the deposit reserve ratio of deposit-taking financial institutions was raised by 0.5 percentage points.

3.11. On August 15, the deposit reserve ratio of deposit-taking financial institutions was raised by 0.5 percentage points.

此后，随着2007年投资继续过热，流动性过剩延续，通货膨胀加重的经济变化，央行加大上调存款准备金的力度。2007年央行共10次上调准备金！而在2008年，央行也一共4次上调了存款准备金率，分别在1月16日、3月18日、4月16日、5月12日宣布上调存款准备金率0.5个百分点，2008年底存款类金融机构人民币存款准备金率达到17.5％的历史新高！

Such a strong monetary policy has achieved obvious results. At the end of 2008, domestic inflation was significantly curbed and prices returned to a reasonable level.

Why is deposit reserve so powerful?
We all know that at first the bank only exchanged currency for customers, and later added a new business, keeping gold and silver for the rich. Others put the gold and silver in his safe, and it issued a receipt for the person and charged a certain storage fee.Over time, some wise people saw the way. Although people deposit and withdraw every day, some gold and silver are always idle in their safes, and the safes are rarely emptied.So the money changers played the trick of "borrowing chickens to lay eggs". Every time someone deposits a sum of money, they only keep a part of it in their hands, and lend the rest.That part of the gold and silver retained by the money changer was later the deposit reserve.

The exact meaning of deposit reserve refers to the deposits in the central bank prepared by financial institutions to ensure customers' deposit withdrawal and fund settlement needs. The ratio of the deposit reserve required by the central bank to its total deposits is the deposit reserve ratio.The reserve fund was originally intended to guarantee payment, but it brought an unexpected "by-product", which is to endow commercial banks with the function of creating money, which can affect the credit expansion ability of financial institutions, thereby indirectly regulating the money supply.The deposit reserve has now become an important tool of the central bank's monetary policy, and it is one of the three traditional monetary policy tools.

我国的存款准备金制度是在1984年建立起来的，至今存款准备金率经历了26次调整。最底的一次是1999年11月存款准备金率由8%下调到6%；最高一次为2008年6月由16.5%上调至17.5%。

Raising the deposit reserve ratio is an important measure taken by the central bank to reduce the excessive liquidity of commercial banks. It will reduce the supply of credit funds, which is a signal of tightening and has a direct relationship with investment.When the central bank raises the required reserve ratio, the ability of commercial banks to provide loans and create credit decreases.Because the reserve ratio increases, the money multiplier becomes smaller, thereby reducing the ability of the entire commercial banking system to create credit and expand the scale of credit. Expenditures are reduced accordingly.vice versa.

For example, if the deposit reserve ratio is 7%, it means that for every 100 million yuan of deposits that financial institutions take in, they must deposit 7 yuan in deposit reserves with the central bank, and the funds used to issue loans are 93 yuan.If the deposit reserve ratio is raised to 7.5%, the loanable funds of financial institutions will be reduced to 92.5 yuan.

Under the deposit reserve system, financial institutions cannot use all the deposits they absorb to issue loans, but must retain certain funds, namely deposit reserves, in case customers need to withdraw funds. Therefore, the deposit reserve system is conducive to ensuring that financial institutions Customer's normal payment.With the development of the financial system, the deposit reserve has gradually evolved into an important monetary policy tool.When the central bank lowers the deposit reserve ratio, the funds that financial institutions can use for loans increase, and the total amount of loans and money supply in the society also increases accordingly; conversely, the total amount of loans and money supply in the society will decrease accordingly.

In this way, by adjusting the deposit reserve ratio, it can affect the credit expansion ability of financial institutions, thereby indirectly regulating the money supply and achieving the goal of controlling economic growth.

There is no necessary connection between the increase of the central bank's deposit reserve ratio and the increase of deposit interest rates.Whether it is raising interest rates or raising the deposit reserve ratio, the intention is to curb the excessive growth of bank credit funds.Raising the deposit reserve ratio can directly freeze the funds of commercial banks and strengthen liquidity management.The main purpose is to strengthen liquidity management and curb excessive growth of money and credit aggregates.At the same time, raising the deposit reserve ratio also reflects the regulation principle of "discriminatory treatment".Compared with raising interest rates, raising the deposit reserve ratio is a monetary policy tool directly aimed at commercial banks, and it does not directly affect corporate finance and people's lives like a "one size fits all" rate hike.

Base money: the "source" of the money supply

With the deepening of financial turmoil in various countries, the world generally pays attention to the stability of China's financial market and the trend of monetary policy in 2009.Experts predict that in 2009, China's base currency has huge potential.It is estimated that in 2009, the maturity of central bank bills, trade surplus, and FDI will bring about a potential base currency of more than 45000 trillion yuan.

First of all, the maturity of central bills will lead to the base money supply reaching 26300 trillion yuan.At present, the central bank mainly regulates the base currency by issuing three-month short-term central bank bills. "Several Opinions of the General Office of the State Council on the Current Financial Promotion of Economic Development" pointed out that "stop issuing 3-year central bank bills and reduce the frequency of issuance of 2009-year and 3-month central bank bills". Basically stop sending.

Why do experts focus so much on the base currency?What is the base currency?
As the source of liquidity, the base currency directly affects the overall liquidity.It can be said that the base currency is the source of the money supply.

Simply put, the base currency is the currency issued by the central bank.The central bank injects base money into the market through certain channels. For example, the central bank grants loans to commercial banks, and the central bank "buys" treasury bonds or foreign exchange held by commercial banks. Through these channels, commercial banks obtain a large amount of funds. , these funds can be used for lending, thus beginning the process of creating derivative deposits.As mentioned earlier, commercial banks can also absorb cash in circulation (that is, the deposit business of commercial banks), use part of the cash for lending, and can also create deposits. These cash in circulation also come from central bank.

From the "source" of base currency to the "flow" of deposit creation, the "pool of water" of money supply is finally formed.In this process, increasing the base currency by 1 yuan will cause the money supply to expand several times.This is why the base currency is also called "high-powered currency" or "powerful currency".

The "mighty" of the base currency lies in its ability to multiply or shrink the total money supply.The base currency is composed of two parts: cash and deposit reserves, and its increase or decrease usually depends on the following four factors:
1. Changes in the central bank's claims on commercial banks and other financial institutions.Generally speaking, the increase of the central bank's claims means that the central bank's rediscount or re-lending assets to commercial banks have increased, and it also means that the base money injected into circulation by commercial banks has increased, which will inevitably lead to an increase in excess reserves of commercial banks. The money supply can be expanded multiple times.Conversely, if the central bank's claims on financial institutions decrease, it will cause a sharp contraction in the money supply.

2. The amount of foreign net assets.Foreign net assets consist of foreign exchange, gold deposits and the central bank's net assets in international financial institutions.Among them, foreign exchange and gold accounts are purchased by the central bank with base currency.Under normal circumstances, if the central bank does not take the stable exchange rate as a policy goal, it will have a greater initiative in the base currency invested through the asset business; otherwise, the central bank will passively enter foreign exchange because it wants to maintain the stability of the exchange rate. The market intervenes to stabilize the exchange rate, so that the supply and demand of the foreign exchange market has a great impact on the central bank's foreign exchange holdings, resulting in the rather passive nature of the base currency introduced through this channel.

3. Net debt to the government.The increase in the central bank's net claims on the government is usually formed through two channels:
One is to directly subscribe to government bonds; the other is to lend money to finance to make up for fiscal deficits.No matter which channel means that the central bank injects base money into the circulation area through the financial department.For example, my country's financial loan stock in 1995 was more than 1600 billion yuan, which had a certain impact on the base money in recent years.

4. Other items (net).This mainly refers to the increase and decrease of fixed assets and the increase and decrease of receivables and payables of the central bank in the process of fund settlement.They all have an effect on the base currency volume.

Choosing Between Contradictions: The Conflict of Monetary Objectives
The economic crisis in Japan, the economic crisis in Southeast Asia, the subprime mortgage crisis in the United States... Some people wonder why the economic crisis occurred?Could it be that the cause of the economic crisis is the problem of inflation, or the problem of international hot money, as most people say?

From the historical development of human beings, no matter any struggle or war, the root cause is often the conflict of internal contradictions, or the distortion of internal ideology.The same goes for currency wars.So, what kind of contradictions and conflicts stem from the currency wars that humans continue to stage?

Some people believe that the most important reason for the economic crisis is the wrong or dislocation of the concept of the target currency and the currency target, the confusion of the concept of the target currency, and the inaccuracy of the currency target.For example, foreign exchange reserves. For a country, foreign exchange reserves are not the goal of currency, but only a means of currency. For a country, the domestic currency is the target currency. Although the trend of economic globalization is unstoppable, human regional and Geographic attributes determine the nature of the target currency.The goal of currency is to maintain the measure of value, that is, the measure and measure of value, and the exchange rate is to maintain the measure of value among international currencies.The conflict between different monetary goals intensified the intensity of the currency war, and an economic crisis broke out.

Let’s not comment on the scientific rationality of this assertion for the time being, but there are indeed serious contradictions and conflicts between different monetary goals in specific historical periods.

The goals of the central bank's monetary policy can generally be summarized as: stable prices, full employment, economic growth, balance of payments and financial stability.The contradiction between various goals is manifested as: there is an alternating relationship between price stability and full employment.In order to achieve the goal of full employment when there is too much unemployment, the monetary policy needs to expand credit and increase money supply to stimulate investment demand and consumption demand, expand production scale, and increase the number of employees; at the same time, due to the substantial increase in demand, it will bring certain degree of price rise.Conversely, if the monetary policy is to achieve price stability, it will lead to a reduction in the number of employed people.

There is also a contradiction between price stability and economic growth.To stimulate economic growth, the expansion of credit and currency issuance should be promoted, which will lead to rising prices; in order to prevent inflation, credit contraction measures must be taken, which may have an adverse impact on economic growth.

There is a contradiction between price stability and the balance of international payments.If inflation occurs in other countries and domestic prices are stable, the country's output will increase and imports will decrease, resulting in a surplus in the balance of payments; otherwise, a deficit will appear, which is a deterioration in the balance of payments.

The contradiction between economic growth and balance of payments.As the economy grows, the demand for imported goods usually increases, resulting in a trade deficit; on the contrary, in order to eliminate the deficit and balance the international balance of payments, it is necessary to tighten credit and reduce the money supply, resulting in a slowdown in economic growth.

Not all five goals of the central bank's monetary policy can be achieved at the same time, and the contradictions among them make the relationship between monetary policies more complicated.Of course, some monetary policies are consistent to a certain extent, such as full employment and economic growth; some are relatively independent, such as full employment and the balance of international payments; more manifested as conflicts between goals.Therefore, the central bank should choose specific policy goals according to different situations, and seek an appropriate combination point among various goals according to specific social and economic conditions.

Money multiplier - the wonderful "multiplier effect"

After the central bank launched the base currency, the currency began to grow exponentially.A key role in this is the currency multiplier.

Assume that the minimum reserve ratio is 20%, that is to say, when the bank gets a deposit of 100 yuan, it must keep 20 yuan and can only lend 80 yuan. Secondly, it is assumed that the bank will put 80 yuan in full.

(End of this chapter)