Currency substitution is a kind of currency disturbance under the open economy, which has a serious impact on a country's economic and financial situation, such as the independence and effectiveness of monetary policy, the weakening of the government's fiscal tax base, the imbalance of international payments, slowing down or even hindering the free convertibility of the country's currency, and more importantly, causing violent fluctuations in a country's exchange rate level.

1, static angle

Generally speaking, the phenomenon of currency substitution shows that a large number of residents in this country convert their local currency into foreign currency. The higher the degree of currency substitution, the higher the demand for foreign currency. Under the condition that the foreign currency supply has not changed greatly, the imbalance between supply and demand in the foreign exchange market determines that the local currency exchange rate will depreciate sharply, while the foreign currency exchange rate will appreciate sharply. DonRoper and LanceGirton of the United States believe that under the condition of currency substitution, the demand for money mainly depends on the difference in real rate of return between local and foreign currencies and between local and foreign currencies and non-monetary assets. According to the purchasing power parity theory and Fisher equation, the formula is obtained:

Where: e stands for exchange rate; "e" indicates the expectation of exchange rate; α represents the substitution elasticity between local and foreign currencies and non-monetary assets; β represents the substitution elasticity between local currency and foreign currency; The above formula shows that the degree of currency substitution has an important influence on the exchange rate level. The greater the currency substitution coefficient β, the greater the influence of expected exchange rate changes on the current nominal exchange rate E, that is, currency substitution will exceed the instability of exchange rate. Extreme, if the currency substitution tends to infinity (complete substitution), the exchange rate also tends to infinity, and the local currency is worthless. Its original meaning means that some countries give up using their own currencies and completely replace their own currencies with foreign hard currencies, as is the case with dollarization in Latin American countries.

2. Dynamic angle

The analysis of the influence of currency substitution on the country's exchange rate is only from a static point of view, and does not involve dynamic exchange rate determination, especially the fluctuation range of exchange rate when a country's money supply changes. Because the size of money stock will affect the purchasing power of unit currency, the change of a country's money supply will cause the relative value of local currency and foreign currency to change. On the premise of currency substitution, domestic residents will inevitably replace currency with stable currency, so large-scale exchange will inevitably lead to exchange rate fluctuations, even exceeding the growth rate of money supply. In this regard, Manfred Gartner of Switzerland put forward the "amplification effect" of the exchange rate, that is, a country's persistent inflation policy will lead to the depreciation of the local currency exchange rate exceeding the growth of the local currency supply. According to the premise that the exchange rate is predictable, the purchasing power parity and the interest rate parity without offset are established.

Second, the choice of RMB exchange rate system.

Since July 2, 2005, China has implemented a managed floating exchange rate system based on market supply and demand and with reference to a basket of currencies. In the same year, the composition principles of a basket of currencies were announced, in which the US dollar, euro, Japanese yen and Korean won were the main basket currencies, and the currencies of countries with large trade volume with China, such as Singapore, Malaysia, Russia, Australia, Canada and Thailand, were also in the RMB exchange rate reference range. For the current exchange rate situation in China, it should be a very rational choice. The following focuses on the exchange rate effect of currency substitution, that is, to analyze the current RMB exchange rate system from a static and dynamic perspective. 1, static angle

Although the single pegged exchange rate system has achieved great success since 1994, it is very expensive to continue to maintain the pegged exchange rate system in the face of the new economic operation environment. At the same time, China does not have the necessary conditions and environment for a floating exchange rate system, and it is difficult to bear the impact of the floating exchange rate system. As Mundell, the "father of the euro", said, at present, to relax the control of RMB exchange rate and allow RMB exchange rate to appreciate, three preconditions must be met: RMB convertibility, balance of payments and global economic stability. The most critical problem in China is the fragility of the domestic financial system, which has not been solved. The market expectation is extremely volatile, which makes the RMB exchange rate easy to reverse and brings serious consequences to the fragile financial system. It can be predicted that once the exchange rate floats freely, international and domestic speculators will take advantage of structural defects in the economic and financial system to speculate in RMB, which will increase the fluctuation of RMB exchange rate and never reach the so-called market equilibrium exchange rate level. This result will most likely lead to a sharp depreciation of RMB, a sharp rise in non-performing assets of domestic commercial banks, and even a financial crisis, which will bring a series of unpredictable adverse consequences to China's economy. Its path is:

Deregulation → RMB exchange rate appreciation → realistic and unrealistic factors → RMB exchange rate depreciation → currency substitution expansion → RMB exchange rate depreciation to a greater extent → financial crisis.

In other words, once deregulation, because the RMB has accumulated a large number of appreciation expectations, it will inevitably lead to the appreciation of the RMB in the short term. However, due to the fragility of the domestic financial system and the volatility of market expectations, the RMB exchange rate will easily reverse, and once the RMB exchange rate depreciates, the public will inevitably replace the currency for the purpose of maintaining value. As DonRoper and LanceGirton believe, the higher the degree of currency substitution β, the greater the value, that is, the expected exchange rate changes will lead to greater fluctuations in the current nominal exchange rate, which will lead to a larger-scale currency substitution and form a vicious circle of depreciation-substitution-re-depreciation. The systemic risk brought by the fluctuation of exchange rate will definitely have a serious impact on China's economic and financial situation. The RMB exchange rate level determined by the market is definitely the direction of China's exchange rate system reform. However, due to the imperfect exchange rate formation mechanism, it is impossible to completely liberalize the exchange rate control and return to the managed floating exchange rate system, that is, to abandon the fixed peg system of blindly pegging the US dollar, reduce the cost of maintaining this system, and maintain the relative stability of the RMB exchange rate without adversely affecting the current economic situation.

2. Dynamic angle

In recent years, China's balance of payments surplus is relatively large, and foreign exchange reserves have increased greatly. If the central bank does not intervene or does not intervene enough, it will inevitably lead to the appreciation of the RMB exchange rate. In order to keep the exchange rate relatively stable, the central bank had to buy a lot of foreign exchange and put in the base currency, which led to a substantial increase in the money supply and increased inflationary pressure. In order to reduce inflationary pressure, the central bank has to expand the issuance of bills or adopt a "hedging" policy. However, due to the high cost and limited offsetting effect of these measures, it is impossible to completely eliminate inflationary pressure, which is easy for economic entities to form inflation expectations, and then lead to a sharp depreciation of the exchange rate. Its path is:

Continued expansion of local currency → inflation expectation → currency substitution, uncertain monetary policy risk → sharp depreciation of local currency exchange rate.

That is, due to the continuous expansion of the local currency by the monetary authorities, the public has formed inflation expectations, that is, the public's demand for value preservation will inevitably lead to currency substitution; Moreover, due to the low transparency of China's current macroeconomic policies, the public's insufficient information on the market, and the lack of sufficient policy tools and rich practical experience in macroeconomic regulation and control by the central bank, the consistency and scientificity of policies need to be further improved. Therefore, for the public, the uncertainty risk of monetary policy is also great, that is, the large-scale currency substitution caused by inflation expectations will lead to the depreciation of the local currency exchange rate exceeding the growth of the money supply, which is what Geithner called the exchange rate "amplification effect". In view of this situation, in order to maintain a relatively stable exchange rate system, the central bank has to put in more base money, which leads to a greater exchange rate amplification effect and more base money input, forming a vicious circle of local currency expansion-exchange rate amplification and depreciation-and then expanding the local currency. This cycle will make the central bank spend more and more money to maintain a relatively stable exchange rate system, and finally it will have to give up this policy. Therefore, in the long run, we should gradually create conditions to improve the marketization of exchange rate formation mechanism, reduce the pressure of passive operation of the central bank, and then relax the floating range of RMB exchange rate and implement a flexible exchange rate system, which may be the best way for the central bank to deal with inflation.

This exchange rate system reform has made the central bank no longer peg to a single dollar currency, and of course it is not pegged to a basket of currencies, but refers to a basket of currencies. This is because no matter what currency you peg to, you will inevitably be hit by speculative capital. In the process of exchange rate reform, it is very beneficial for the central bank to manage the floating exchange rate and only refer to a basket of currencies, which gives the central bank greater initiative in actual operation, improves the flexibility of macro-control, and can reflect the trade situation of China more comprehensively, especially to spread the exchange rate risk of China and avoid the instability of cross-exchange rates. The further reform of the exchange rate system shows that the managed floating exchange rate system combines the advantages of the fixed exchange rate system and is pegged to a basket of currencies to some extent, which can be said to be successful. This reform of exchange rate system can basically stabilize the exchange rate level and increase the competitiveness of RMB. When faced with external and internal shocks, the gradual adjustment of domestic prices and wages cannot absorb the shocks, the exchange rate level can be adjusted calmly. When regional or global currency shocks or financial crises have a great impact on China's economy and finance, we can actively intervene in the market to minimize the impact of crisis contagion, deflation and capital flight. More importantly, the reform of the exchange rate system shows that the China government has taken another step in the marketization of the exchange rate formation mechanism.

Based on the above analysis, the conclusion is that the return to a managed floating exchange rate system is in line with the actual situation in China and is a very rational choice, which is conducive to maintaining the relative stability of the RMB exchange rate and creating conditions for improving the marketization of the exchange rate formation mechanism.