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2020 | OriginalPaper | Buchkapitel

2. China’s Monetary Policy: Institutional Setting, Tools and Challenges

verfasst von : Patrick Hess

Erschienen in: Monetary Policy Implementation in East Asia

Verlag: Springer International Publishing

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Abstract

Understanding the monetary policy of China, the world’s second largest economy, is more crucial today than ever, and yet it is not widely researched or well-understood outside of China. This chapter tries to narrow this gap by shedding light on the institutional setting of China’s monetary policy, and by assessing its main tools and current challenges. It finds that, despite the progress and sophistication of Chinese monetary policy in recent years, for example, by moving from quantity-based to more price-based tools, its implementation suffers from shortcomings in communication and a lack of independence from political interference. Ultimately, it seems to be the Chinese Communist Party (CCP) that determines the “room for manoeuvre” that the People’s Bank of China (PBC) has in order to maintain monetary and financial stability in the rapidly changing domestic and global environment. As a result, even in terms of communication, the PBC seems to deviate from today’s central bank norm of taking transparency for granted for effectively managing inflation expectations.

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Vorheriges Kapitel Monetary Policy in East Asia: Implementation Matters

Nächstes Kapitel Inflation Targeting in Korea

Quoted in Bloomberg News (2016).

Jan Fredrik Qvigstad, On Central Banking, 2016, p. 36. In his foreword, the economist and economic historian Michael Bordo notes that “Norges Bank has the best record in the world in transmitting its intentions, its forecasts, and the models it uses”, so Qvigstad can count as a prime expert on the topic.

In his lecture, Qvigstad recalls how, in 1780, fortified walls helped the Bank of England to protect successfully itself against riots, which afterwards led to the saying “safe as the Bank of England”.

Ibid., p. 34 and pp. 35–36, respectively.

This includes the central bank of China’s largest trading partners. In the 25 April 2019 issue of the ECB’s Economic Bulletin, the word “China” appeared 67 times (not least due to the US–China trade war), while, in the previous eight issues (May 2018 to March 2019), it appeared on average only 25 times.

On the evolution and legal framework of the PBC, see Bell and Feng (2013), and Pißler (2015). Founded in December 1948, the PBC was, from 1953 to 1978, the sole bank of the People’s Republic of China (PRC) and undertook all central and commercial banking functions. It assumed the role of a central bank only in 1983, and the “Big Four” state-owned commercial banks were established from 1979 to 1984. Despite a respective regulation issued in 1986, the PBC’s central bank status was legally confirmed only in 1995 with the adoption of the Law of the PRC on the PBC (amendment in 2003).

Until then, the PBC had also been responsible for banking supervision, which, after December 2013, was taken over by the China Banking Regulatory Commission (CBRC) established in March 2013.

See Zhongguo Renmin Yinhang Tiaofa Si (2018), which is only available in Chinese. The translation of this and other quotations from this law, and from all other Chinese sources, were made by the author.

See, for example, Yi (2018a), in which he states: “By ensuring basic stability of the value of RMB, we can help promote economic growth, and thereby meet the ultimate goal of monetary policy specified in the Law of the People’s Bank of China”. The statement is also relevant from another perspective as Yi Gang or the PBC, in general, seem to regard economic growth as taking priority over the first goal.

See Prasad and Zhang (2014), who provide a summary of monetary policy until 2013, and Ma (2014). For the link between China’s monetary policy and its RMB exchange-rate regime, see, also, Sun (2017).

For the full member list of the current MPC (only in Chinese), see 中国人民银行货币政策委员会委员 Zhongguo Renmin Yinhang Huobi Zhengce Ersi (2019). Guo is, strictly speaking, also Deputy Governor of the PBC, but he sits on the MPC as CBIRC Chairman.

See Zhongguo Renmin Yinhang Huobi Zhengce Ersi (2010). Article 20 stipulates that the MPC meets “in the middle of the first month of each quarter”, and can hold ad-hoc meetings upon request by the Chairman or more than one-third of its members.

The MPC of the Eurosystem (the central bank system of the euro area) also has an advisory role, as it only prepares monetary policy decisions, which are taken by the ECB’s Governing Council (consisting of the Executive Board of the ECB and the Governors of all euro area central banks). On the other hand, the Federal Open Market Committee (FOMC) of the US, the Policy Board of the Bank of Japan, and the MPC of the Bank of England do have exclusive decision-making power on monetary policy.

In terms of gender diversity, the PBC’s MPC scores worst among the major central banks, as there are currently no women (although in the past there were), while the ECB’s Governing Council, the BoJ’s Policy Board and the Bank of England’s MPC all have one female member, and the FOMC even has three.

For their backgrounds, see https://www.boj.or.jp/en/about/organization/policyboard/index.htm.

Later, the otherwise untouched CSRC also received a new Chairman with the appointment of YI Huiman.

On the meaning and implications of the Chinese institutional reforms of spring 2018, see, also, Hess (2018).

On the FSDC and other economic policy measures after the 19th Party Congress, see Naughton (2018).

Ulrich Bindseil, Monetary Policy Operations and the Financial System, 2014, p. 10.

McMahon et al. (2018), p. 6. As further evidenced, the authors note that the 2018 Government Work Report did no longer specify any target value for the monetary aggregate and credit aggregates.

Yi (2018a).

See McMahon et al. (2018).

Unlike other major central banks, the PBC has not yet used quantitative easing, i.e. asset purchases, as it still has “policy space” with short-term interest rates not having reached zero yet. But, in January 2019, it introduced a targeted medium-term loan facility (TMLF, 定向中期借贷便利) at a rate of 40 basis points below the standard 1-year MLF rate, to boost lending to small- and medium-sized enterprises (SMEs), and banks with a “potential to step up support to SMEs” may use the facility. See J.P. Morgan (2019).

All quotations are from Bindseil (2014), pp. 9–10.

Caps on lending rates had already been eliminated 2 years earlier, in 2013. See Hess (2014), footnote 18.

J.P. Morgan (2018a), p. 2.

And the third tool is also linked to the second tool, as, despite the official removal of the deposit-rate ceiling in 2015, there is still informal guidance by the PBC on the upper limits of bank deposit rates.

A rare exception was the PBC’s announcement of a “discussion” on 15 November 2018 between its Governor Yi, the CBIRC Deputy Chairman WANG Zhaoxing and the heads or deputy heads, which may be a sign that the meeting was called at very short notice, of several share-holding commercial banks and all “Big Five” (ICBC, BoC, CCB, ABC and BoCOM), and the Party Secretary of China Development Bank (see Zhongguo Renmin Yinhang 2018). According to the announcement, Governor Yi stressed in the meeting that banks should increase their efforts to provide loans to private firms and SMEs facing financing difficulties, in line with Xi’s call that the financial industry should support the real economy.

This has also been publicly stated by the PBC. See Yi (2018b), where he made the following statement: “At present, the focus of China’s monetary policy is gradually shifting from quantity control to price control”. On China’s evolving monetary policy framework, see, also, Girardin et al. (2017).

See Reuters (2019b). The original PBC announcement has “small and micro enterprises” (小微企业).

This was informally stated by a PBC representative in late 2018, but Yi (2018b) holds a similar view: “Fiscal policy should focus on rebuilding buffers while accommodating growth needs” (p. 2).

See Zhou (2016). In an internal presentation in October 2016, the former MPC member HUANG Yiping from Peking University called it a “complicated relationship among these objectives”.

With an overall leverage in the economy of around 260% of GDP, J.P. Morgan’s observation that “curbing credit growth” is China’s “Achilles heel” seems to be very true. See J.P. Morgan (2018b).

Quoted in Reuters (2019a).

McMahon et al. (2018), p. 10. Earlier analyses of the effectiveness of the PBC’s monetary policy and the transmission of its interest policy can be found in Sun (2013), Ma et al. (2015), respectively.

In a note prepared for the G-20 Finance Ministers and Central Bank Governors’ Meetings in February 2016, the IMF stated that “in China, […] the authorities should ensure clear communication of their exchange rate policies”. See IMF (2016), p. 8.

McMahon et al. (2018), p. 23. Lo (2015) reaches a similar conclusion by noting in his chapter China’s Future Monetary Policy, p. 185, that the PBC “will have to adopt some form of forward guidance as a communication strategy to provide information to the public on future monetary policy stance”.

Bälz and Heckel (2015) have analysed the four main aspects of central bank independence for the BoJ.

Japan’s Ministry of Finance (JMoF) also controls the budget of the BoJ, and expenses related to monetary policy are carved out with the approval of the JMoF, in sharp contrast with the PBC, where they are not, as it is not as financially independent as the former. See Bälz and Heckel (2015), p. 32.

McMahon et al. (2018), p. 5.

Ibid., p. 4.

Cf., Reuters (2018). ZHU Rongji had also been both Vice Premier and PBC Governor in the early 1990s.

Hou (2019), p. 4.

Cited in Bloomberg News (2016). Kuijs had been the World Bank’s Senior Economist on China before.

Bälz, M., & Heckel, M. (2015). The Independence of the Bank of Japan in the Light of Statutory Rules and Central Bank Independence Indices. In F. Rövekamp, M. Bälz, & H. G. Hilpert (Eds.), Central banking and financial stability in East Asia. Cham et al: Springer.

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Titel: China’s Monetary Policy: Institutional Setting, Tools and Challenges
verfasst von: Patrick Hess
Verlag: Springer International Publishing
Buch: Monetary Policy Implementation in East Asia
Print ISBN: 978-3-030-50297-3

Electronic ISBN: 978-3-030-50298-0

Copyright-Jahr: 2020
DOI: https://doi.org/10.1007/978-3-030-50298-0_2