A Diagram to Understand the Underlying Logic of the Monetary System

This diagram of the excess savings system serves as a 'microscope' for observing the transmission of central bank monetary policy.

It helps brothers understand the financial underlying logic from phenomena to mechanisms, breaking down 'Where does the money come from, where does it go, and how is it regulated?' to truly grasp the operation code of China's monetary system.

Starting from the formula for excess reserve requirements, variables such as foreign exchange reserves and central bank debt issuance connect the monetary cycle of the central bank - banks - enterprises and residents:

How does the settlement and sale of foreign exchange reflect real-sector foreign-related behavior?

How do foreign exchange reserve requirements adjust cross-border capital flows?

Historically, how have adjustments to the settlement and sale of foreign exchange reshaped market expectations?

Essentially, the excess reserve system is the 'interface for managing' the central bank's regulation of base money. Through it, one can understand how monetary policy plays a game between internal and external balances—when foreign exchange reserves change, how does the central bank hedge liquidity through tools? When market liquidity is abundant or tight, how does excess reserve become a 'barometer'?

For studying monetary finance, this diagram is a key anchor point for understanding money creation, cross-border capital flows, and the central bank's toolbox, helping brothers break down 'Where does the money come from, where does it go, and how is it regulated?' to truly grasp the operation code of China's monetary system.