China Monetary Policy

1
China Monetary Policy

• Lea Vassallo

2
Peoples Bank of China (PBC)

• Founded in 1948 in the Hebei province
• Headquarter is now in Beijing
• Dual Role before 1983
• Central Bank
• Commercial Bank

3
PBC Dual Function

• As a Central Bank
• Regulates the money supply
• Set interest rates
• Manage foreign exchange
• Oversee other financial institutions

4
PBC Dual Function (continued)

• As a Commercial Bank
• Handle the deposits
• Managed all the credit cooperatives
• Provided loans to all financial institutions

5
Structure of PBC

• Governor is currently Zhou Xiaochuan. This
  position is appointed by the President of PBC,
  nominated by the Premier, and approved by the
  Nationals Peoples Congress.
• Deputy Governors are appointed by the Premier
  of the State Council. They are Wu Xiaoling, Su
  Ning, Xiang Junbo, Hu Xiaolian, and Liu Shiyu.

6
Monetary Policy Goal

• Maintain stability of the Renminbi currency to
  promote economic growth

7
Monetary Policy Tools

• Reserve Requirement
• Open Market Operations (OMO)
• Window Guidance
• Interest Rate Control

8
Reserve Requirement

• Is the minimum checking account balances
  (deposits) required by PBC for banks to hold
• PBC increased their reserve requirement by .5
  percentage points in May 15, 2007

9
Reserve Requirement

• Increasing the Reserve Requirement is a
  contractionary measure to decrease money supply
• The Federal Reserve has not used this monetary
  policy since 1990s

10
Open Market Operations

• China historically not a fan of OMO
• OMO was first introduced in 1993 and discontinued
  in 1997 and again re-introduced in 1998
• An increasing trend in the last years in using
  OMO to control money supply
• Issuance of Renminbi bonds in Hongkong

11
Window Guidance

• PBC provides an extension of banks credit which
  increases the banks reserve balances and may
  have a controlling effect in limiting the
  increase in interest rates.
• In March 14, PBC requested banks to
  comprehensively, correctly, and actively apply
  the policies set by PBC in extending loans.

12
Interest Rate Control

• PBC increased interest rates in the first quarter
  of 2007 by .27 percentage points in the first
  quarter of 2007
• The deposit rate increased from 2.52 to 2.79
  percent and the lending rate increased from 6.12
  to 6.39 percent

13
Interest Rates

• China has a rapid growing economy and is trying
  to slow down growth by applying contractionary
  policy of increasing interest rates

14
Increased M1

• Coin and Currency, travelers checks, and
  checkable deposits

15
Increased M2

• M2 M1 Regular Savings Deposit, Money market
  deposit account, small
  denomination time deposits, and retail money
  market

16
Increased M0

• M0 Currency in Circulation

17
References

• China Currency. 2006. China Business 2.0. 02 June
  2007 lthttp//www.chinabusiness2.com/china_currency
  /gt
• Management and Organizational Structure Page.
  2004. Peoples Bank of China. 02 June 2007
  lthttp//www.pbc.gov.cn/english/renhangjianjie/gt
• Lardy, Nicholas. Chinas Unfinished Revolution.
  The Evolving Banking System. Washington DC
  Oakland Street Publishing, 1998. 61-63.
• China-Law on the Peoples Bank of China 1995
  Page. 1995. China People Bank 1995 sst. 03 June
  2007 lthttp//www.jus.uio.no/lm/china.people.bank.1
  995/landscape.pdfgt
• Laurens, Bernard, and Rodolfo Maino. China
  Strengthening Monetary Policy Implementation.
  January 2007. IMF Working Papers. 03 June 2007
  lthttp//www.imf.org/external/pubs/ft/wp/2007/wp071
  4.pdfgt
• China Money Supply Page. 2006. RMB Guide. 03 June
  2007. lthttp//www.rmbguide.com/China_Money_Supply.
  htmgt