China’s Central Bank & Monetary Policy

1. China’s Central Bank & Monetary Policy Implications for the Global Economy Presented by Louisa Chu

2. Introduction • Why is the Chinese economy important? • 2nd largest economy • Rapid economic growth rate • Affects many other national economies

3. 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

4. Important Functions • 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

5. Objective of Monetary Policy • “Maintain the stability of the value of the currency and thereby promote economic growth” • Done through various policy instruments: • Reserve requirement ratio • Base interest rate • Rediscounting of loans • Rules for central bank lending • Open market operations

6. Similarities Create monetary policy Similar MP instruments Regulate financial institutions Advisory committee Perform economic research Must report to State Council through Quarterly reports Differences Independence of treasury from bank Is completely state-owned PBC not completely independent from government for important functions China operates bank-based system Comparison with the Fed

7. 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

8. Interest Rates • 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

9. 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

10. 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

11. 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

12. Historical Exchange Rates

13. Historical Exchange Rates

14. 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

15. 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

16. Any Questions? Thank you