China’s Central Bank & Monetary Policy
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Transcript of China’s Central Bank & Monetary Policy
China’s Central Bank & China’s Central Bank & Monetary PolicyMonetary PolicyImplications for the Global EconomyImplications for the Global Economy
Presented by Louisa Chu
IntroductionIntroduction
Why is the Chinese economy Why is the Chinese economy important?important? 22ndnd largest economy largest economy Rapid economic growth rateRapid economic growth rate Affects many other national Affects many other national
economieseconomies
Overview of Central BankOverview of Central Bank
People’s Bank of ChinaPeople’s Bank of China Created in 1948Created in 1948 Responsible for both Central and Responsible for both Central and
Commercial banking activitiesCommercial banking activities 1983 (economic reform) split off 1983 (economic reform) split off
commercial banking and was commercial banking and was legally proclaimed as the legally proclaimed as the country’s central bankcountry’s central bank
Important FunctionsImportant Functions
Formulate & implement Monetary Formulate & implement Monetary PolicyPolicy
Issue currency & maintain stable Issue currency & maintain stable exchange rateexchange rate
Regulate financial marketsRegulate financial markets Manage state treasuryManage state treasury Conduct economic research & Conduct economic research &
analysisanalysis Protect state foreign exchange & Protect state foreign exchange &
gold reservesgold reserves Utilizes various instruments to Utilizes various instruments to
stabilize the financial systemstabilize the financial system
Objective of Monetary PolicyObjective of Monetary Policy
““Maintain the stability of the value of Maintain the stability of the value of the currency and thereby promote the currency and thereby promote economic growth”economic growth”
Done through various policy Done through various policy instruments:instruments: Reserve requirement ratioReserve requirement ratio Base interest rateBase interest rate Rediscounting of loansRediscounting of loans Rules for central bank lendingRules for central bank lending Open market operationsOpen market operations
Comparison with the FedComparison with the Fed
SimilaritiesSimilarities Create monetary Create monetary
policypolicy Similar MP Similar MP
instrumentsinstruments Regulate financial Regulate financial
institutions institutions Advisory committeeAdvisory committee Perform economic Perform economic
researchresearch Must report to State Must report to State
Council through Council through Quarterly reportsQuarterly reports
DifferencesDifferences Independence of Independence of
treasury from banktreasury from bank Is completely state-Is completely state-
ownedowned PBC not completely PBC not completely
independent from independent from government for government for important functionsimportant functions
China operates China operates bank-based systembank-based system
Interest RatesInterest Rates
Bank lending industry is growing Bank lending industry is growing rapidlyrapidly
Too much credit growth could Too much credit growth could lead to non-performing loanslead to non-performing loans
Contradictory to efforts to Contradictory to efforts to increase consumptionincrease consumption
Recently raised lending interest Recently raised lending interest ratesrates
Interest RatesInterest Rates
ImplicationsImplications Increased savingsIncreased savings Decrease in property developmentDecrease in property development Decreased investment in financial Decreased investment in financial
securities, thus slowing maturity of securities, thus slowing maturity of global financial marketsglobal financial markets
Negative effect on investors’ Negative effect on investors’ sentiments about future ratessentiments about future rates
Appreciation of currencyAppreciation of currency
OMO & ReservesOMO & Reserves
Further tighten money supplyFurther tighten money supply This year, issued over 600billion This year, issued over 600billion
Yuan in bank bills & repurchase Yuan in bank bills & repurchase agreementsagreements
Effective July, reserve ratio Effective July, reserve ratio raised to 8% raised to 8%
150billion Yuan out of circulation150billion Yuan out of circulation Exchange rate policy Exchange rate policy
contradictory to these market contradictory to these market actionsactions
Exchange RateExchange Rate
““artificial”artificial” undervaluedundervalued Pegged to dollar until recentlyPegged to dollar until recently Not controlled by market but Not controlled by market but
through volatility of other through volatility of other currenciescurrencies
Import/export prices are not fairImport/export prices are not fair China’s mounting surplusChina’s mounting surplus
Exchange RateExchange Rate
China’s reasoning: stabilityChina’s reasoning: stability Devaluation since economic Devaluation since economic
reform in the 1980sreform in the 1980s Do not care about other Do not care about other
countries’ opinions or pressurescountries’ opinions or pressures Central bank’s objectives are Central bank’s objectives are
not in line with the state’snot in line with the state’s
Historical Exchange RatesHistorical Exchange RatesYear Rate Year Rate
1970 2.46 1987 3.72
1971 2.267 1988 3.72
1973 2.04 1989 4.72
1974 1.84 1990 5.22
1975 1.97 1991 5.263
1976 1.88 1992 5.42
1977 1.73 1993 5.75
1978 1.58 1994 8.446
1979 1.5 1995 8.318
1980 1.53 2000 8.178
1981 1.75 2001 8.277
1982 1.93 2002 8.277
1983 2.8 2003 8.277
1985 3.2 2004 8.276
1986 3.72 2005 8.199
2006 8.037
Rate stated in terms of Yuan per US Dollar
Historical Exchange RatesHistorical Exchange Rates
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
0.000
1.000
2.000
3.000
4.000
5.000
6.000
7.000
8.000
9.000
Rate
Year (1970 - 2006)
Annual Exchange Rate (Yuan/Dollar)
Rate
Future PredictionsFuture Predictions
Central bank and government Central bank and government relaxing on exchange rate policyrelaxing on exchange rate policy
““Gradually retreat from active Gradually retreat from active role in onshore currency markets role in onshore currency markets to give market forces more say in to give market forces more say in setting Yuan’s price”setting Yuan’s price”
Economy passing stage of Economy passing stage of “industrializing” to become “industrializing” to become industrialized and a world powerindustrialized and a world power
Future ImplicationsFuture Implications
““fairer” world marketfairer” world market True valuation of YuanTrue valuation of Yuan Access to China’s markets by Access to China’s markets by
outside investorsoutside investors Economic freedom for businesses Economic freedom for businesses
and individualsand individuals Increased consumption & access Increased consumption & access
to foreign goodsto foreign goods
Any Questions?Any Questions?
Thank youThank you