This research paper focuses on the impacts of the electronic currency on Chinese Monetary Policy. Currently, the advancement of the electronic money has been the prominent interest among the Chinese governmental organizations. In this country, there is a great potential that the electronic currency tends to substitute the cash a way of transaction processes among the various users and entities. The electronic money is usually recorded by a special device to determine the possessions whether can be in the prepaid card or personal computer. This research paper argues that the development of the electronic money in China will become a very crucial form of currency in the near future. The implementation and the effectiveness of Chinese Monetary Policy will greatly be influenced through the development of the electronic money. The central bank of China is entrusted with the responsibility of coordination and the flow of the currency within the country. With regard to the development of the electronic currency, the various operations of this bank will have to change in order to explicitly meet various transactional requirements of the country.
The electronic currency involves a type of currency which can be transacted only in digital form as opposed to physical form. It is a kind of payment method that can only be carried out in digital form. The utilization of current technology such as the smart phones, computers as well as the internet networks usually play a major role of transferring the digital currency from one person or entity to other. The instantaneous transactions can be done easily with the digital currency. It is usually recorded electronically with the help of a special kind of device. The goods and services can be purchased with the electronic currencies which in turn will facilitate the economic growth.
The emergence of the various innovations and the advancement of the information technology are aiming at altering the retail payments in China. The adoption of this new mode of transactions has great influence in the banking industry especially in its implementation and effectiveness. The use of e-wires, pre-paid card as well as e-purse can progressively record an increase.
The existing role of making payments with the cash is likely to be a challenge due to the development of the transactional innovations. There is a great potential that the mode of transactions will become relatively ease and fast. Regardless of the great merits to be achieved with this new system, the transactional innovations are likely to pose a number of challenges in monetary policies in the central banks. This paper provides a precise description of the electronic money and the impacts on the monetary policy implementation in China. It verifies greatly on the various factors that affect the electronic products as well as reviewing the monetary policy issues in the country. In other words, this paper attempts to provide the viable answers to the potential questions. “Does the development of electronic money have great influence on monetary policy and in the running of the Chinese banks?
China has experienced an exponential growth of economy over the last decades. China has formulated a special policy referred to as Chinese Monetary Policy whose main aim is to regulate and manage the currency or financial flow within the country. The Central Bank of China is a country’s institution which is entrusted with the responsibility of controlling the monetary policy. This bank has relatively higher amount of assets as compared to other public financial institutions in China. The State Council has provided The Central Bank of China a mandate to draft and implement the monetary policy. The main goal of this is to enhance the financial stability as well as maintaining the value of the China currency which facilitate the stimulation of the economic growth of the country.
2. Aims and Objectives of the research
The main goal of this research study is to provide description on how digital currency or electronic currency has impacted on the Chinese Monetary Policy.
The core purpose of this study work is to recognize the various transactions made between different persons and entities with the electronic currency.
3. Problem of the study
The term electronic (Currency) money involves the new proposed systems of payments through which the consumers use to make retail payments. According the study conducted by Berensen, (Berensen.A., 1997), it asserts that the developments of the electronic money has a greater potential to substitute the cash payments. This policy provides clear view on the great impacts that the electronic currency has on the monetary policy as well as on the banking systems. The development of the electronic will be dependent on such factors as increased security, future technology, the ease of conversions as well as different regulations. The transactional innovations have great impacts on such variables as exchange rates, velocity of money flow, multiplier as well as the monetary supply. The utilization of the electronic currency have direct impact on the central bank as well as its monetary policy control systems.
4. Significance of the study
The electronic currency is recognized to have an intimate effect on the implementation of the Chinese Monetary Policy. The electronic currency provides a relatively quick mode of transactions amongst different entities or users. This study aims at recognizing the utilization of the currency in China as a way undertaking the transactions and how these transactions have influenced the implementation of the Chinese Monetary Policy. The recommendations to be made in this research work will further enhance critical making of observations of these transactions and therefore, the country’s economic growth can be advanced.
5. Background Information
Currently, the central bank of China has embraced the electronic currency prototype system which makes it to be the first bank to issue its own electronic currency. The bank plans to establish an electronic currency institute within the country. The recent advancements have clearly embraced the digitalization of the Chinese currency, Renminbi (RMB) with its implications.
From the research study undertaken by Crockett, (Crockett, 1998), it shows that the RMB digitalization has put China a step forward in relative with other global currencies. China has recorded over 70million people using the internet services more than the combination of United States and European Union. It is still anticipated that the internet services are getting prominent in China. Currently, approximately half of the China’s population has accessed to internet services. Therefore, through the utilization of the internet services, the e-commerce, online payments as well as the electronic financial transactions have risen greatly. China is almost becoming the cashless society where most transactions are undertaken electronically.
According the study undertaken by Elly, (Elly, 1996).the online as well as mobile payments in China has attributed to a total 2172.6 trillion RMB in the year 2015.On the future policy, most economic activities in China are getting to be undertaken digitally. In the year 2017, special innovative conference has been held in Beijing where senior officials from China’s Central Bank, financial regulators as well as Chinese financial institutions attended.
6. Banning of the bit coin and private crypts
With the development of the digital currency, China has exercised its policy of banning the utilization of bit coins as well as other crypto currency exchanges. The adoption of legal tender has led to the following outcomes;
· Reduction of transaction costs
· Enlightening the rural areas with the financial services.
According to the researcher, Yao Qian, who studied on the China’s People Bank, the digital currency has impressed Chinese Monetary Policy to be able to suit the delivery of the required services. The banking policies have been changed due the development of digital economy. The China Central Bank has formulated its policy by issuing the electronic currency in order to meet the requirements. Therefore, the utilization of the electronic currency has impacted on the Chinese Monetary Policy.
With the development of the electronic money, the transaction process is not the same as the other payment process. It is well illustrated the in the flow chart given below;
7. The Regulatory Issues and Potential Policy Responses to the Advancements of the Electronic currency
This part offers the verifications on the basic monetary policy responses due to the development of the electronic currency. Moreover, it highlights other factors which provide the required reinforcements relating the transactional innovations of policy regulation related issues. Some of these factors are on the basis of the equivalence as well as deposit-taking.
7.1. Basic Monetary Policy Concerns
There are two factors which usually limit the risk of over issue which include remuneration of the electronic balances and the issuer would be obliged to have the electronic money balance. An even greater measure that is offered the viable consideration due to the developments of the electronic money is the introduction of the coverage requirements.
7.2. Effective functions of payment systems
The advancement of the electronic money should not negatively affect the smooth operation of the payment systems. The electronic currency provides the efficient way of making payments. The merit of this system can only be realized if it can ensure the compatibility of use by all the users. The mismanagement and the failure of the electronic money issuance have great negative impacts on the transactions as well on the financial electronic products. Moreover, much reliance of the electronic monetary systems among the various banks can lead to the decreased convectional payment systems that have been in the existence.
The total issuance of electronic money as well as the value of electronic money transactions are well illustrated as shown in the chart given below;
Chart 1: The total issuance of electronic money and the value of electronic money transactions
7.3. Customers and merchants protection
In the market set up, the creditworthiness of the debtor can only be assessed by the creditor. With regard to the credit institutions, most of the potential customers cannot accessed to the required quality of these institutions because they lack the viable understanding the imposed technical security of their offered payment systems.
Electronic currency is used to represent the liabilities of the user balance sheet. The electronic currency may not viable especially when the user liabilities are greater that his or her assets. Therefore, the investment policy is greatly influenced.
The central banks are likely to be subjected to the greater challenge due to lack of proper understanding of important use of electronic currency amongst the customers. They may not even recognize the clear distinctions between the traditional systems and the proposed electronic currency as a means of the making payments. The merchants and consumers are unlikely to recognize the electronic currency as the reliable source of wealth because they view the great potential risks to be encountered.
The creditworthiness of the issuers may not adequately assessed by the customers. The potential risks can be reduced through proper consideration of the regulatory concerns.
The various transaction relationships are illustrated in the chart given below;
Chart 2: The various transaction relationships
8. Impacts of Electronic currency on Chinese Monetary Policy and Central Banks
The great reliance on the usage of the electronic currency has led to various research studies to be conducted in order to ascertain the resulting impacts on the financial institutions as well as on the implementations of the monetary policy in China. The introduction of the new system of payment has led to the control of the ability of the Chinese Central Banks especially in financial flow and transactions. Some researchers have uttered that the new system will have drastic impacts on the running of most Chinese Banks while others commented that the existing form of transactions will be absolutely replaced by the new system. The definition of the money usually determines the ability to regulate the money supply.
The operation markets opened by the central banks will be limited due the introduction of the electronic money. There will be a reduction of the open market operations due to the adjustment of money to demand.
According to the study conducted by Rahn (Rahn, 2000), it asserts that there will be a reduction bank’s liabilities and assets especially if the money supply is to be kept fixed. With regard to this, the money management as well as the interest rate management will be weakened through the operations of the open markets.
The various circulation shares of the electronic money can be illustrated in the chart given below;
Chart 3: various circulation shares of the electronic money
The concept of adopting the electronic currency to be utilized as the means of the transaction activities has been optimistically perceived by most Chinese population. They desire to undertake their activities at a relatively faster rate and in an easier way. The fraud possibility has made the central banks to have a need of limiting the growth of the electronic money. There are some measures which have been taken which can be verified as follows;
v The proliferation of the electronic money has been limited in order to avoid the central bank currency replacement.
v The electronic money products as well as the electronic currency balances should be treated in the similar way as do central bank currency.
v The high reserve requirements should be applied on the electronic money balances.
v The excessive liquidity generated by the suitable monetary operations should be absorbed carefully.
The above verified measures will enable the central banks to exercise the required control of the monetary aggregates.
The increased use of the electronic money can affect the money velocity. According to the Rahn, he suggested that there is a gradual velocity of money and the compensating adjustments by Federal Reserve. Rahn feels that there should be proper adjustments since the current systems are quite gradual and obvious. (Rahn, 2000).
According to the research conducted by Tak, (Tak, July,2002),he asserts that it is not easy to measure the ultimate changes in velocity since the circulation of the income velocity is done on the basis of the term-end money supply to the national income ratio.Therefore,it is difficult for the money flow to be achieved through this new system.
The time and space requirements for settling the expenses of payment transactions will have to inevitably reduce due to the adoption of the electronic currency in China. This impact occurs due to the fact that the different issuers have different perceptions towards the financial transactions. With regard to this effect, the Chinese has to formulate some policies to be able to facilitate the required transactions.
The introduction of the electronic currency has a great potential to increases the transaction volumes through the promotion of the transaction convenience. (Tak, July,2002).The adoption of the new system has great impact of increasing the velocity of money which will then be computed easily.
The adoption of the electronic currency will contribute a lot towards enhancing the transaction activities. The transactions are to be made across several mile distances between different entities and the users. The transactions made through the adoption of the electronic currency will incur less transaction costs and therefore, the people will get motivated. As a result, there will be increased number of transaction activities in the country. This will lead to the implementation of various monetary policies in order to facilitate these transactions. Generally, the adoption of the electronic money will influence the ability of the central banks to control the money flow.
The trading activities as well as the trade exchange rates will greatly increase due to the development of the electronic money. The transaction activities will be faster across different countries since the electronic currency can break the possible barriers between these countries. The policy laws will have to be formulated to be able to meet the trading requirements.
The prominent use of the electronic money as the substitute of the conventional currency can affect the money multiplier. The introduction of the electronic money has led to the decreased currency while increasing the various deposits of money due to the cash retained relaxation by the private prosperity. Therefore, the money multiplier is becoming larger due to the reduced currency ratio. Generally, the electronic money will have a great impact on the money multiplier via the currency ratio.
The reserves can also be affected by the development of the electronic currency. The smart cards as well as the network money can have great influence on the private financial institutions. The currency flow within the country can be perfectly control by the central banks. With the developments of the electronic currency, the control banks have to implement some monetary policies so as to facilitate the running of their transaction operations. According to Rahn, (Rahn, 2000), he says that no much complications can be encountered since the system is gradual and measurable and the central banks are provided with the required for their adjustments.
The development of the electronic balance has direct impact on the security purposes. The new technology can easily be corrupted by the frauds. The smart cards as well as the electronic balance can be manipulated easily which results in the lack of security. With the development of the electronic money, there is a great potential of having mobile money network getting controlled or stolen
The above verified clearly indicate that there is great impact on transactions which will in turn affect the monetary policy. The financial transactions can only run with the help of implemented monetary policy. The people start fearing for storing their money in the electronic money balances.
The expansion and the implementation of the electronic money systems can be limited by the costs to be incurred. The new system can be expanded through the material support provided by different financial orgnizations.Unfortunately, many organizations may not even be willing to offer financial support towards expanding the new system of transaction.
The electronic currency to be implemented in the new future will depend on such factors as the regulation of it, its growth, advanced technology. These factors will facilitate an increase of the security. If this new system increases and prominently used in the most part of the country, there will a great impacts on the central banks especially in executing their tasks.
The following conclusions can be drawn;
1) This paper has clearly shown the policies which are likely to arise due to the introduction of the electronic money. It has been precisely verified that the Chinese central banks play a major role in the monetary flow. In addition, the adoption of the new system affect the way monetary policy can be implemented.
2) The great reliance of the electronic money will lead to the following;
v The velocity of money will get increased
v Seignorage income will become lower
v The reserves will be decreased
v The money multiplier will change
v The monetary control will be decreased internationally.
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