The rapid growth of China's foreign exchange reserves in recent years is mainly due to the sharp depreciation of the US dollar in the international currency market and the policy of pegging the RMB to the US dollar. As an international currency, the depreciation of the US dollar is largely due to the twin deficits of foreign trade and finance in the United States, as well as the financial and fiscal policies of the US government serving itself, including the low interest rate and tax reduction policies in recent years. The depreciation of the US dollar has stimulated the international capital to flow to other countries, including China. According to the "ternary paradox" of Mundell-Fleming model, a country can only give up one thing at most, but not both. At present, China adopts a fixed exchange rate linked to the US dollar, which sacrifices an independent monetary policy to a certain extent in the case of relative capital flow: a large amount of foreign currency hot money flows in, resulting in a large increase in foreign exchange holdings and RMB issuance; In this case, the China government can only make a compromise choice between inflation and issuing domestic debt (central bank bills or government bonds), while the central bank has lost its independent right to issue its own currency to some extent. Moreover, the huge foreign exchange reserves purchased by the China government at the expense of issuing RMB assets (RMB, central bank bills or government bonds) will also face the risk of depreciation of the US dollar.

Loss of independence of monetary policy. The first is that currency issuance is becoming more and more dollarized. Secondly, the excessive growth of foreign exchange reserves has increased the difficulty and complexity of the central bank's monetary policy implementation, which has gradually lost the independence of China's monetary policy implementation. Third, it increases the operating cost and difficulty of monetary policy. In order to eliminate the influence of the increase of foreign exchange reserves on the increase of money supply, the central bank must withdraw RMB from the RMB open market to offset the influence on monetary policy. The central bank has to issue a large number of central bank bills to hedge and withdraw funds from the financial market to reduce the money supply in the market. Under this passive "wide money" pattern, the deposits and deficits of the whole financial system have greatly expanded, the interest rate in the money market has continued to fall, and the autonomy of the central bank's monetary policy has been greatly restricted.

In addition, the large increase in foreign exchange reserves also limits the central bank's use of other tightening policy tools. At present, China's economy is slightly overheated, and raising interest rates by the central bank is a common macro-control measure. But now the government is cautious about raising interest rates, and one of the important reasons is the pressure of RMB appreciation. Therefore, the increase of foreign exchange reserves also limits the central bank to regulate the economy by raising interest rates.