The inflation in China is quite different from the inflation that has appeared several times since the reform and opening up in China. Of course, all inflation is the result of multiple basic currencies, and inflation is a monetary phenomenon in the final analysis. At this point, this inflation is no different from previous ones. However, the reasons why these currencies appear frequently in China are quite different from those in previous times. This time, the increase in China's currency is mainly due to China's excessive implementation of the mode of relying on exports and attracting foreign investment to promote economic growth, excessive expansion of exports and blind attraction of foreign investment, resulting in a serious imbalance in China's international payments. The normal item of the balance of payments is the imbalance between import and export, which is manifested as excessive trade surplus; The capital account of the balance of payments is also unbalanced, indicating that the capital surplus is too large. Therefore, there is not only a trade surplus in imports and exports, but also a capital surplus in the capital account, that is, a double surplus in international payments. This double surplus will inevitably force the central bank to put in the base currency to buy too much foreign exchange flowing into China, thus causing the central bank to put in too much base currency, making the central bank's currency issuance too much foreign exchange and foreign exchange reserves too much.
The problems caused by the export-oriented economic growth mode of China's economic reform in 2007 show that the current imbalance of international payments in China has caused excessive RMB foreign exchange and foreign exchange reserves, with serious consequences: First, too much RMB accounts for more of the base currency, which has led to inflation. As mentioned earlier, the main reason for China's inflation this time is the serious imbalance of international payments, forcing the central bank to put in more base money and more money. Second, the current huge foreign exchange reserves can neither be used for social security nor for earthquake relief, and certainly cannot be used as a "stabilization fund" to save the plummeting stock market, because foreign exchange reserves are a symbol of external purchasing power, and if they are used in China, they must be converted into RMB, which is equivalent to issuing additional currency, which will further aggravate inflation. Third, excessive foreign exchange reserves have caused China's property to shrink. For example, the dollar reserve will shrink when the dollar depreciates. Even if we buy American bonds, we will suffer losses, especially some bonds are risky. For example, by 2007, we held bonds of two American real estate companies, Fannie Mae and Freddie Mac, amounting to $376 billion. Although the bonds of these two companies are guaranteed by the U.S. government, the huge crisis of these two companies will still make our assets face tremendous shrinking pressure. The amount of US Treasury bonds held by China is already very large, and US Treasury bonds based on government credit will also damage our property if the dollar depreciates. Fourthly, foreign exchange reserves can hardly be used for the purchases we need, for example, we need to buy new technologies and resources, but these are exactly what international sellers are unwilling to give to China, and China's foreign purchasing power is actually difficult to achieve. Fifth, if you invest overseas by establishing a state-owned company, who can guarantee that the investment will not suffer huge losses? Historical experience and practice have proved that the risk of huge losses is great. In short, it is not a good thing that RMB foreign exchange accounts for too much and foreign exchange reserves are too large due to the imbalance of international payments.
How? The key is to deepen reform.
First of all, we should make the exchange rate a real market mechanism. Under the condition of exchange rate as a market mechanism, its free fluctuation will first effectively adjust the normal items of international payments, namely import and export. For example, the rise of exchange rate will inevitably curb excessive exports and help promote imports, thus maintaining the balance between imports and exports; However, the decline of exchange rate will inevitably help promote exports and effectively curb imports, thus promoting the balance of imports and exports. At the same time, the exchange rate will also effectively regulate the capital account in the balance of payments, thus maintaining the balance of the international capital account. In short, only by maintaining the nature of the exchange rate as a market mechanism can it help to maintain the balance of payments. China's current problems are the result of artificially controlling the exchange rate for a long time. If the exchange rate falls, it will not fall, and if it rises, it will not rise, resulting in a serious imbalance in the balance of payments, which will lead to domestic inflation and shrinking overseas wealth. Some people say that Japan entered the economic recession 20 years ago because of the appreciation of the yen, but Japanese experts told me that Japan's economic problems were caused by the failure to appreciate the yen in time, which was the result of exchange rate control, not the result of the appreciation of the yen. It can be seen that we must move towards the marketization of exchange rate.
Second, we must truly form a foreign exchange market. The foreign exchange market is the most important mechanism to adjust the foreign exchange scale of a country. Under the condition that the foreign exchange market is truly open, the increase of foreign exchange will not lead to the introduction of the central bank's base currency, because foreign exchange will soon be bought by the people for international purchase. In fact, there is no real free foreign exchange market in China, and foreign exchange under capital account has not been liberalized. Therefore, foreign exchange flows into China only through the acquisition of the central bank, and the central bank is forced to issue more RMB, which ultimately promotes the formation of domestic inflation. If we have a real foreign exchange market that allows people to buy and sell foreign exchange freely under the capital account, then the central bank will not need to issue more money to buy foreign exchange, and foreign exchange will soon be bought by private forces and spent abroad, so there will be no domestic inflation.
Here, there is a basic economic common sense that must be reiterated, that is, the balance of payments must be maintained.
As a developing country, it is no problem to actively expand exports, but we must maintain the balance of international trade, and we must not have too much trade surplus under the normal account of the balance of payments, that is, the import and export account, resulting in too much foreign exchange reserves. International trade is an important driving force for China's economic growth, but we should not blindly expand exports, but moderately export. The key for international trade to promote economic growth is to promote the increase of total import and export, rather than overemphasizing the increase of total export. The wealth of a country depends on the total amount of imports and exports, that is, the total amount of trade, not just the total amount of exports. We can't confuse the total import and export volume with the total export volume. What is significant for economic growth is the total import and export volume. The growth of GDP is related to the total import and export, not simply to the total export. Especially when the export volume is large, but the import volume is also large, it shows that we have exchanged material wealth for material wealth, instead of exchanging material wealth for banknotes printed in other countries. However, if we export a lot, but import too little, it means that we have exchanged our material wealth for banknotes printed in other countries. In fact, we have traded our hard-earned material wealth for "risk", because the paper money of other countries will depreciate, which will lead to the frequent appearance of RMB in China. Therefore, we should pursue the increase of total import and export, not just the increase of export volume.
At the same time, as a developing country, it is right for us to attract foreign investment, but we can't blindly attract foreign investment, and we can't cause capital account imbalance in the balance of payments, that is, capital surplus. As mentioned earlier, excessive foreign investment will lead to frequent RMB and inflation. In fact, excessive foreign investment is actually the same as promoting economic growth by issuing more money, which will inevitably lead to inflation. Because any foreign investment, as long as it is not in kind, but in foreign exchange, the central bank must buy the foreign exchange flowing into China, and the result can only be more money. Therefore, it is necessary to make an in-depth analysis of attracting foreign investment and selectively attract foreign investment, especially in the form of foreign exchange. For example, we cannot simply allow foreign investors to buy shares of enterprises in China in the form of foreign exchange, because if these foreign exchange flows into China and cannot be spent abroad, it will inevitably increase the investment of RMB in China, resulting in multi-currency and inflation.
Therefore, any country must abide by this economic law: the balance of payments must be balanced. If the balance of payments is seriously unbalanced, it will be punished. For example, China is currently suffering from a double balance of payments surplus, while Viet Nam is suffering from a double balance of payments deficit. All emerging economic entities should pay attention to this.