In this paper, the law of money circulation in Mainland China is explored. One part of the study surveys the channels through which money flows and also the system of banking settlements. In addition, the author demonstrates the weaknesses in the traditional currency – total retail sales index and constructs four new indexes to evaluate the money flow.
Two important results of the study are summarized below:
(1) Theoretically, the law of money circulation insists that the purpose of money circulation is to serve the commodities flow by acting as a medium for commodities transactions. Under the Chinese economic system, the construction of plans (e.g., credit plan, financial plan, and cash control plan) is subordinate to the overall physical national plan. Because of this, the quantity of money circulation is decided immediately after the quantity of commodities circulation has first been decided.
(2) Related to the question of how to set up a good index capable of indicating how much money supply in circulation in society is necessary for smooth commodities transactions, the paper contains some important remarks. Under the Chinese money and banking system, the People’s Bank of China acts as a monopoly bank and serves as the center of cash, credit, and settlements. Currency held by the state sector, state enterprises, and households are deposited in the banking system, which also is the intermediary for inter-state-unit payments. As a result of this, the money flow actually consists of two circuits: one is a bank deposit flow circulating among enterprises and units within the state sector, and the other is a currency flow serving households and collectives in the nonstate sector. Therefore, before one attempts to explore the law of money circulation, the concept of money should be defined clearly.
Mainland Chinese economists have defined money as cash. They use the ratio between currency and total retail sales to measure whether or not the currency flow would be able to tally with the commodities flow. A ratio between 1:8 and 1:9 would be considered as indicative of a good economic situation. If this ratio dropped to 1:7, it would represent that the money supply was relatively high compared to the commodities flow and if the ratio declined further to 1:5.5, serious inflation would be indicated. This traditional index, however, could only illustrate the relationship between the currency flow and the flow of commodities that could be paid for with cash. In order to explore more broadly the relationship between the two flows, four indexes are constructed. The results from each of these indexes illustrate that the volume of currency in circulation and banking credit was expanded more rapidly than were commodities in circulation beginning in 1978, but they were reduced and controlled by the authorities in 1982.
