With the international community screaming that a "currency war" is on the horizon, suspicions that China is issuing excessive currency are rising from every corner. But it is not reasonable to jump to that conclusion, says an editorial in Economic Information Daily. Excerpts:

Theoretically, the supply of currency is determined by the currency authority and the financial agencies' debt to the public. Changes in the currency supply, to a large extent, demonstrate changes of demand for the currency. The latest data show China's balance of M2 money supply by the end of 2012 was 97.42 trillion yuan ($15.63 trillion). The proportion of M2 to GDP in China was 188 percent, a historic high, compared with the United States' 63 percent.

In fact, different countries have different national and financial conditions. For example, the statistical measures of M2 vary from one country to another. So it is irrational to compare the proportion in China with that in the US.

In developed countries, some financial tools undertake functions of currency, but they are not counted as part of M2. In the countries having developed financial market, the nonfinancial sectors can obtain large financing support from market sectors other than the banking system.

China's monetization process has different structural and institutional foundations from other countries. The government-led elemental monetization distribution plays a leading role. So it is a kind of "passive creation" in the international capital circulation, and the financial resource allocation efficiency is very low.

First, China's monetary stock is controlled by the monetization degree of the Chinese economy. The growth of China's currency supply has been faster than the economic growth on average. Secondly, the huge funds outstanding for foreign exchange have greatly changed the currency creation mechanism and supply structure. The growth of funds reserved for foreign exchanges' share in the overall growth China's monetary base becomes larger and larger. Last but not least, the heavy reliance on investment is another important reason to stimulate the excess issuing of currency.

So China's excess issuing of its currency is the result of many problems: the lack of independence of China's central bank's currency policies; the economic structural imbalance; and its less-developed financial systems. If China does not reform its heavy reliance on investment and carry out an all-around reform of the financial sector, it will be impossible to control the excess issuing of currency in China through the central bank's tightening monetary and credit policies.