Transcript China`s Central Bank & Monetary Policy

China’s Central Bank &
Monetary Policy
Implications for the Global Economy
Presented by Louisa Chu
Introduction
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Why is the Chinese economy
important?
2nd largest economy
 Rapid economic growth rate
 Affects many other national
economies
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Overview of Central Bank
People’s Bank of China
 Created in 1948
 Responsible for both Central and
Commercial banking activities
 1983 (economic reform) split off
commercial banking and was
legally proclaimed as the
country’s central bank
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Important Functions
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Formulate & implement Monetary
Policy
Issue currency & maintain stable
exchange rate
Regulate financial markets
Manage state treasury
Conduct economic research &
analysis
Protect state foreign exchange &
gold reserves
Utilizes various instruments to
stabilize the financial system
Objective of Monetary Policy
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“Maintain the stability of the value of
the currency and thereby promote
economic growth”
Done through various policy
instruments:
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Reserve requirement ratio
Base interest rate
Rediscounting of loans
Rules for central bank lending
Open market operations
Comparison with the Fed
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Similarities
Create monetary
policy
Similar MP
instruments
Regulate financial
institutions
Advisory committee
Perform economic
research
Must report to State
Council through
Quarterly reports
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Differences
Independence of
treasury from bank
Is completely stateowned
PBC not completely
independent from
government for
important functions
China operates
bank-based system
Interest Rates
Bank lending industry is growing
rapidly
 Too much credit growth could
lead to non-performing loans
 Contradictory to efforts to
increase consumption
 Recently raised lending interest
rates
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Interest Rates
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Implications
Increased savings
 Decrease in property development
 Decreased investment in financial
securities, thus slowing maturity of
global financial markets
 Negative effect on investors’
sentiments about future rates
 Appreciation of currency
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OMO & Reserves
Further tighten money supply
 This year, issued over 600billion
Yuan in bank bills & repurchase
agreements
 Effective July, reserve ratio
raised to 8%
 150billion Yuan out of circulation
 Exchange rate policy
contradictory to these market
actions
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Exchange Rate
“artificial”
 undervalued
 Pegged to dollar until recently
 Not controlled by market but
through volatility of other
currencies
 Import/export prices are not fair
 China’s mounting surplus
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Exchange Rate
China’s reasoning: stability
 Devaluation since economic
reform in the 1980s
 Do not care about other
countries’ opinions or pressures
 Central bank’s objectives are
not in line with the state’s
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Historical Exchange Rates
Year
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 Rates
Annual Exchange Rate (Yuan/Dollar)
9.000
8.000
7.000
6.000
5.000
4.000
Rate
3.000
2.000
Year (1970 - 2006)
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1978
1976
1974
0.000
1972
1.000
1970
Rate
Future Predictions
Central bank and government
relaxing on exchange rate policy
 “Gradually retreat from active
role in onshore currency markets
to give market forces more say in
setting Yuan’s price”
 Economy passing stage of
“industrializing” to become
industrialized and a world power
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Future Implications
“fairer” world market
 True valuation of Yuan
 Access to China’s markets by
outside investors
 Economic freedom for businesses
and individuals
 Increased consumption & access
to foreign goods
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Any Questions?
Thank you