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View of China’s Central Bank and Monetary Policy in the Context of Global Financial Crisis: A Historical View

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4 Thomas Cooley et al., "The Power of Central Banks and the Future of the Federal Reserve System". Taylor, "The Fear of Freedom: Politicians and the Independence and Accountability of Financial Sector Supervisors. Looser policy can adjust interest rates and banks' reserve requirements to increase investment and in turn "warm" the economy.

Further, persistently falling inflation reduced the likelihood of "big bang" stimulus measures.56 Alternatively, the central bank could maintain the supply of credit - total social financing. 57 Lingling Wei, "China Plans Boosting Liquidity to Counter Yuan Weakness," The Wall Street Journal, August 24, 2015.

PBOC’S MAjOR CHALLENGES IN FORMuLATING MONETARY POLICY

A. Inflation

B. Exchange Rate

As for inflation concerns, the central bank can undo its recent liquidity injections in the short term by letting bond repurchase agreements expire. A more balanced trade would aim to address the main source of disruption in China's trade relations with the US and accelerate the appreciation of the Chinese currency against the dollar. PBOC exercises control over renminbi and is able to steer the exchange rate in line with the daily reference rate.

The renminbi can now fluctuate within a band, up or down by 1% from the PBOC's daily midpoint, the daily reference rate against the dollar set by the PBOC. The central bank's tolerance to let the renminbi rise appears to be at odds with the central bank's maximum bias that the renminbi was close to its equilibrium value given the smaller current account surplus and capital outflows.64 Thus, the PBOC's policy was to continue currency reforms to change the yuan to a more freely traded currency, while maintaining a controlled exchange rate for the yuan.65 Nevertheless, the indication of flexibility was based on economic grounds – exports appeared to be recovering. The PBOC usually sets a stronger fix in response to an overnight weakening of the dollar index, which tracks the value of the greenback against a basket of currencies dominated by the euro.67 Inflation also pressures the central bank to increase its tolerance for yuan appreciation as a stronger currency. would facilitate price growth by lowering the yuan-denominated prices of imported goods.

This dilemma shows that China's monetary policy remains at the mercy of its rigid exchange rate system. The PBOC, unlike its US counterpart, does not have the ability to control an independent monetary policy. This is because buying or selling the yuan to influence its exchange rate would affect domestic liquidity, forcing the central bank to adjust its monetary policy as a result.

In the past decade, the PBOC has sold yuan and bought dollars to prevent the yuan from appreciating too quickly, leading to a massive foreign exchange reserve and causing the central bank to absorb liquidity by raising the reserve requirement ratio for banks. increase .

C. Capital Controls

Capital inflows are expected to generate higher demand for the yuan, which could boost mainland consumer inflation and increase pressure on the yuan to strengthen. Strong inflows led to a 1.6% appreciation of the renminbi against the dollar in the first half of 2013. Unlike the two-way movements in the yuan exchange rate or capital outflows in 2012, it was more likely to see greater risks of capital inflows into China mainly associated with funds originating from quantitative easing in developed economies betting on faster economic growth in emerging economies or foreign capital inflows betting on yuan appreciation.

The US Federal Reserve's third round of quantitative easing, as well as China's export growth and economic recovery could dampen demand for the yuan. A full liberalization of capital flows does not guarantee a full opening of capital account transactions. The net effect on the exchange rate, cost of capital and demand may be modest.

For example, foreign currency inflows from China's trade surplus and (net) foreign direct investment amounted to about US$108 billion in the third quarter of 2012. China's capital controls prevent players from directly pouring money into domestic financial markets, but creative speculators have long devised ways to circumvent these controls. Economists at Global Financial Integrity, a US research group that campaigns against illicit financial flows, have discovered huge discrepancies between (i) China's reported exports to the world and the world's stated imports from China; and (ii) China's purchases from the world and world exports to China.

This rampant misinvoicing suggests that China may have understated its exports and overstated its imports by a combined US$430 billion in 2011.73 These discrepancies partially confirm the difficulty of tracking the cross-border flow of capital in China, a country with such to combat heavy crossing. -border flow of goods.

D. Exports

A popular method has been to inflate export invoices for hard-to-value goods, such as electronic circuits, to post speculative cash as trade receipts, and to convert dollars into renminbi on current accounts. Companies may lose confidence in the valuation story and start holding their foreign trade receipts in dollar deposits instead of converting them. Demand for Chinese exports has been strong recently as the US economy picks up steam while imports have lagged weak domestic demand.

E. Capital Markets

G. Global Impact

H. Renminbi Internationalisation Strategy

The main concerns for the IMF were whether China is willing to allow the market to play a greater role in determining the value of the renminbi and to resist the temptation to continue to tightly manage its trade bond. On a technical level, the main concern is whether the currency was sufficiently free to use. The PBOC said it would set the daily midpoint for the renminbi's trading band in line with where the currency closed the previous day, giving the market more leverage.

The PBOC has effectively defanged potential critics such as the US and the IMF by offering exactly what has been asking for it - more currency flexibility. The IMF offered a cautious endorsement of China's move to let the market play a greater role in setting the value of its currency. The IMF said in the statement that China's new pricing regime was "a welcome step as it should give market forces a greater role in determining the exchange rate."

This could help China's push to establish itself as a much-lauded reserve currency for the renminbi alongside the dollar, euro, yen and pound sterling. It admitted that "a more market-driven exchange rate would facilitate SDR operations if the renminbi were included in the currency basket." China's move is far from the last China will have to take if it wants the renminbi to be embraced by the IMF, which made clear that: "We believe China can and should aim for an effective floating exchange rate system within two or three years .”78. The IMF later postponed its labeling until 2016 and decided not to include the renminbi in its so-called special drawing rights basket, which is supposed to contribute to the international splendor of the renminbi.79.

PBOC NEW LOANS REFERENCE REFORMS Different monetary policies implemented by central banks may have different.

PBOC’S NEW LENDING REFERENCE RATE REFORMS Various monetary policies implemented by central banks may have different

In turn, that rate is linked to the price the PBOC charges lenders for cash over a year. The PBOC's interest rate reform, aligning official interest rates with those of the market, pushes China's financial system further toward becoming truly market-oriented and away from the communist-era command economy, where PBOC officials set both the price and quantity of credit. This may be the reason why the PBOC has not lowered or even completely abolished the benchmark lending rate.84.

First introduced in October 2013, the LPR was adopted to better reflect market demand for funds compared to the reference rate, which is set only by the PBOC. 82 Commercial lenders submitting prices for the calculation of the new LPR will report in terms of a spread over and above the interest rate of the PBOC's medium-term loans, currently 3.3%. The other monetary policy tool used by the PBOC is the MLF rate, which is more aligned with the dynamics of supply and demand in China's money markets.

The one-year interest rate for the MLF is around 3.3%, much lower than the PBOC's benchmark lending rate of 4.35%. However, the command-based interest rate does not necessarily work well as the Chinese economy has become increasingly engaged in the global marketplace and the PBOC's benchmark interest rate is unable to accurately reflect the supply and demand equilibrium. Commercial lenders still prefer to use the PBOC's benchmark rates as a reference to price their loans to ensure profitability.

The PBOC may move toward a system where the short-term lending rate to banks is the PBOC's main monetary tool.

CONCLuDING REMARKS

The inability to correct these imbalances after the financial crisis actually took China in the wrong direction. Now, China's monetary policymakers are in the difficult position of balancing short-term growth stability with long-term economic health. Rising local government debt and the rise of the shadow banking system are testing the mettle of regulators and policy makers.

Yuan Gains Expected to Remain Puffless Next Year.” South China Morning Post, December 31, 2012. Central Bank Reports Rise in Small Loan Lending.” South China Morning Post, July 27, 2011, Sec. The Power of Central Banks and the Future of the Federal Reserve System.” In Regulating Wall Street, Viral V .

Everbright Bank Lines up Big Guns for HK Listing. South China Morning Post, July 27, 2011, sec. People's Bank of China sounds alarm about inflationary pressures | Southern China Morning Mail.” South China Morning Mail. The Stiglitz Report: Reforming the International Monetary and Financial Systems in the Aftermath of the Global Crisis.

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