Transcript Monetary Policy

Monetary Policy
Junhui Qian, 2014 November
Content
• Basics
• Monetary policy during the reform
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Reserve requirement
Central bank loans
Rediscounting
Interest rate policy
Exchange rate policy
Open market operations
Credit policy and window guidance
• Balance sheet of the central bank
• Monetary policy in the future
Functions of A Modern Central Bank
• Banking for the government
• Control availability of money and credit
• Operate payment and settlement system
• Lender of last resort
• Surveillance and regulation of commercial banks
Objectives of Monetary Policy
• Low and stable inflation
• Low employment (high economic growth)
• Financial market stability
• Stable foreign exchange rates
Intermediate Objectives of Monetary Policy
• Interest rates
• Money supply
• Base money: currency in circulation + reserve
• Money multiplier: Money supply (M2 or M1) / Base money
• Total credit and loans
Instruments of Monetary Policy
• Interbank overnight lending rate (e.g., US federal funds rate)
• Discount window (e.g., China’s Standing Lending Facility)
• Reserve requirement
• Central bank loans (Lending to financial institutions) and
rediscounting
• Issuance of central bank bills/papers
• Open market operations
• Trading treasury bonds
• Repo and reverse repo
What Makes A Central Bank Successful?
• Independence
• Group decision making
• Accountability and transparency
• Explicit goals
• Disclosure requirements
• A coherent policy framework
• Rule-based monetary policy
• Trade-off among conflicting goals
Central Banking Before The Reform
• Credit and cash plans were part of the central economic planning.
• The planner controlled how much credit and cash should be issued
and who should receive them.
• With virtually no financial market, the planner easily controlled
money supply.
The Birth of The Chinese Central Bank
• Before the reform, PBC was a bureau under the Ministry of Finance in charge of
monetary matters for economic planning.
• The Agricultural Bank of China (ABC) was formed in Jan 1979 and was in charge of
banking for the rural sector.
• Bank of China was spun off in March 1979 and specialized in foreign currency
management.
• On Sep 17 of 1983, the State Council decided to transform PBC into a central bank in
charge of monetary policy. Mechanism for reserve requirements and lending to
commercial (special) banks was established.
• The Industrial and Commercial Bank of China was formed in Jan 1984 and took away the
industrial and commercial banking business of PBC.
• By 1984, PBC became a de facto sole-purpose central bank.
• In 1995, the Law of People’s Bank of China was passed, PBC became the central bank of
China formally.
General Trends of Chinese Central Banking
• More and more independent, from the Ministry of Finance, from the
local governments, and in the future, from the State Council.
• In 1995, overdraft by MF was forbidden.
• In 1998, nine big branches replaced the old 31 provincial branches.
• Rely less and less on command, and more and more on indirect
control through market-based instruments.
Content
• Basics
• Monetary policy during the reform
•
•
•
•
•
•
•
Reserve requirement
Central bank loans
Rediscounting
Interest rate policy
Exchange rate policy
Open market operations
Credit policy and window guidance
• Balance sheet of the central bank
• Monetary policy in the future
Reserve Requirement
• Reserve requirement was established in 1984.
• Two accounts: deposit reserve and settlement reserve
• The deposit reserve ratio (DRR) was 20% for enterprise deposits, 40% for
savings deposits, 25% for rural deposits.
• In 1985, the DRR was unified as 10%.
• The DRR was raised to 12% in 1987 and 13% in 1988 to combat inflation.
• In 1989, the settlement reserve was required to keep 5%-7% of all deposits.
• In 1998, two accounts were unified.
• The DRR was lowered from 13% to 8%.
• Banks may keep excess reserve in PBC.
• Deposit reserves are interest-bearing.
Small Banks
Big Banks
2012
2011
2011
2011
2010
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2007
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2003
2003
2003
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2002
2002
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2000
2000
2000
1999
1999
1999
1998
1998
1998
Required Reserve Ratio (1998-2012)
25%
20%
15%
10%
5%
0%
Interest Rate on Reserve
Interest Rate on Reserve
10.00%
9.00%
8.00%
7.00%
6.00%
5.00%
4.00%
3.00%
2.00%
1.00%
0.00%
5/15/1993
7/11/1993
5/1/1996
8/23/1996
10/23/1997
3/21/1998
7/1/1998
Required Reserve
12/7/1998
Excess Reserve
6/10/1999
2/21/2002
12/21/2003
3/17/2005
11/27/2008
Central Bank Loans
• The central bank loan is the central bank’s lending to commercial
banks and other financial institutions.
• CBL was a major source of base money expansion.
• Since 1994, position for purchasing foreign exchange became the
major source of base money expansion.
• Since 1998, central bank loans was used in adjusting lending structure
in the economy or injecting liquidity to financial institutions in
distress.
Rediscounting
• The central bank may inject liquidity into the banking sector by
discounting commercial papers held by banks.
• Rediscounting often happens when banks are in distress.
• Rediscounting was one of the major instruments in the 1990s, and
was used both in adjusting structural composition of liquidity
provision and in signaling policy orientation.
• The role of rediscounting has declined since 2000.
Interest Rate Policy
• Before 1995, almost all interest rates were determined by PBC.
• Since 1995, PBC has been persistently liberalizing interest rates.
• In June 1996, interbank lending rate was liberalized.
• In June 1997, interbank bond market was opened. Repo rate and
interest rate on bonds were liberalized.
• In Sep 1998, interest rates on the issuance of policy bonds and
treasury bonds were liberalized.
• In Sep 1999, treasury bonds started to be auctioned in the interbank
bond market.
• In Jan 2007, SHIBOR (ShangHai InterBank Offer Rates) was started.
Liberalization of Interest Rates on Deposits
and Loans
• The ordering the interest rate liberalization: first foreign, then
domestic; first money market, then loans, then deposits; first longterm big-denomination, then short-term small denomination.
• By Nov 2013, only the domestic deposit rate has a upper-limit. Other
interest rates, including those on loans, are all determined by the
market.
-5
Interest Rate on One-Year Deposit
Inflation
Shibor
2013/08
2013/03
2012/10
2012/05
2011/12
2011/07
2011/02
2010/09
2010/04
2009/11
2009/06
2009/01
2008/08
2008/03
2007/10
2007/05
2006/12
2006/07
2006/02
2005/09
2005/04
2004/11
2004/06
2004/01
2003/08
2003/03
2002/10
2002/05
2001/12
2001/07
2001/02
2000/09
2000/04
1999/11
1999/06
1999/01
1998/08
1998/03
1997/10
1997/05
1996/12
1996/07
1996/02
1995/09
1995/04
1994/11
1994/06
1994/01
1993/08
1993/03
1992/10
1992/05
1991/12
1991/07
1991/02
1990/09
1990/04
Interest Rates
Interest Rates
30
25
20
15
10
5
0
Exchange Rate Policy
• In 1994, RMB official exchange rate was merged with the market rate.
• The interbank foreign exchange market was established.
• The exchange rate was formally determined by the market. But PBC
intervened heavily.
• From 1995-2005, the RMB/USD was de facto pegged at 8.3, with a
daily fluctuation capped in [-0.3%, 0.3%].
• From July 2005, RMB no longer pegs USD, but a basket of foreign
currencies. RMB started to appreciate gradually.
RMB/USD Exchange Rate
RMB/USD Exchange Rate
10.0000
9.0000
8.0000
7.0000
6.0000
5.0000
4.0000
3.0000
2.0000
1.0000
0.0000
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
RMB/USD Exchange Rate
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Open Market Operations
• OMO in China include trading of treasury bonds, issuance of central bank
bills, conducting repo and reverse repo.
• Bonds trading and repo operations are both limited by the quantity of
bonds in the open market.
• In the late 1990s, purchasing treasury bonds was the major source of base
money expansion.
• From 2003, PBC started to issue central bank bills. CBB became the major
instrument for sterilization of money expansion due to the purchase of
foreign exchange reserve.
• In 2007, the Ministry of Finance increase the supply of treasury bonds. PBC
increased the usage of repo and reverse repo in the adjustment of shortterm liquidity in the market.
Credit Policy and Window Guidance
• Credit policy is still being used in adjusting supply of loans to different
sectors, industries, geographic areas.
• Window guidance is the central bank’s advice for commercial banks. It
is up to banks to accept it or not.
• Before 1998, monetary policy was based more on command. It was
called “direct management”.
• After 1998, monetary policy was achieved more by changing liquidity
conditions in the market and by window guidance. This was called
“indirect management”.
Content
• Basics
• Monetary policy during the reform
•
•
•
•
•
•
•
Reserve requirement
Central bank loans
Rediscounting
Interest rate policy
Exchange rate policy
Open market operations
Credit policy and window guidance
• Balance sheet of the central bank
• Monetary policy in the future
Balance Sheet of PBC
Assets
Foreign Assets (FA)
Foreign Exchange (Forex)
Monetary Gold (Gold)
Other Foreign Assets (OFA)
Liabilities
Reserve Money (RM, “Base Money”)
Currency Issue (CI)
Deposits of Other Depository Corporations
(DODC)
Deposits of financial corporations excluded from
Reserve Money (DFCXR)
Claims on Government (CG)
Deposits of Government (DG)
Bond Issue (BI)
Claims on Private Sector
Claims on Other Depository Corporations (CODC)
Claims on Other Financial Corporations (COFC)
Claims on Non-financial Sector (CNFS)
Other Assets (OA)
Foreign Liabilities (FL)
Own Capital (OC)
Other Liabilities (OL)
A Simplified Liability Sheet
The total liability (or total value) of PBC can be
decomposed into:
𝑉 =𝐶+𝐷+𝐸
Liabilities of Central Bank (V)
C
Currency
D
E
Deposit of Other Depository Corporations
Deposit of Government
Bond Issue
Equity
The Great Accommodation: Debt Financing
Replaces Currency Issuance
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
1999
2000
2001
2002
2003
2004
2005
Share of D. Financing (%)
2006
2007
Share of Currency (%)
2008
Other
2009
2010
2011
2012
The Rise and Fall of CBB
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
1999
2000
2001
2002
2003
2004
Bond Issue Share
2005
2006
2007
Deposit Reserve Share
2008
Other
2009
2010
2011
2012
Monetary Policy in the Future
• The transition of Chinese central banking is still ongoing.
• The following transitions has yet to achieve:
• A more independent central bank.
• Quantity target gives way to interest rate target
• Complete interest rate and foreign exchange rate liberalization