Abstract Based on the money demand model of interest rate parity, the paper empirically studies the influencing factors of China’s currency substitution and anti-substitution after the RMB exchange rate system reform in 2005 by the method of VECM. The results show that there are long-term co-integration relations among and between Chinese currency substitution & currency anti-substitution, RMB exchange rate, real economic growth of China, the US-China interest rate difference and Chinese CPI; the RMB exchange rate and real economic growth of China are the most important factors to influence Chinese currency substitution & anti-substitution. Therefore the main motivation of China’s substitution is the foreign exchange arbitrage and Chinese authorities should make full use of tax policy and interest rate policy to maintain the stability of RMB exchange rate and economic growth.
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