concerns the actions of a central bank or other regulatory authorities adopt to manage and regulate currency and credit in order to achieve certain macroeconomic goals. The monetary policy of China aims to keep the value of the RMB stable and contribute to economic growth. "The Law on the People's Bank of China stipulates that the objective of monetary policy is to keep the value of RMB stable to contribute to economic growth."
The Formation of China's Steady Monetary Policy Richard C.K. Burdekin "What has driven Chinese monetary policy since 1990? Investigating the People’s bank’s policy rule"
The steady monetary policy with Chinese characteristics came into being gradually after 1998. The so-called prudent monetary policy means its goal is to use currency stability as a goal, correctly handle the relationship between preventing financial risks and supporting economic growth, and maintain a moderate growth of money supply to support the sustained and rapid health of the national economy while improving the quality of loans. The background of the central government's steady monetary policy mainly includes the following aspects: First, after the real estate and development zone boom of the early 1990s, by 1997 and 1998, the risk of some small and medium-sized financial institutions has become quite prominent. At that time, the Chinese government and the People’s Bank of China Faced with the important task of resolving financial risks and preventing the emergence of new and more serious financial risks; Second, at the time, although the contradictions of insufficient total social demand have been exposed, the most prominent ones are structural problems, and the actual effective loan demand is insufficient; The long-term implementation of a financial system based on indirect financing of banks, high corporate debt management, and a low proportion of self-owned funds continue to significantly increase the number of loans, and the problem of non-performing loans will become more pronounced. Fourth, the implementation of a proactive fiscal policy will itself include the use of policies, the additional issuance of treasury bonds, and the participation of banks in purchases themselves include the use of monetary policy to support economic growth. The prudent monetary policy implemented since 1998 has achieved great success. Mainly in four aspects: First, the steady growth of total money and credit. From 1998 to 2001, the growth rate of broad money supply was basically controlled between 14% and 15%. Compared with the ups and downs of currencies and credits in the past years, we finally managed to regulate the growth of money and credit more smoothly. Second, the credit structure has been greatly adjusted. Driven by a series of credit policies, the ratio of personal housing loans, infrastructure loans, and agricultural loans has increased significantly. In the year of the new loans, the above three loans accounted for roughly 70% of the total. This adjustment of the credit structure has effectively promoted the nationals adjustment of economic structure. The third is to maintain domestic financial stability and the stability of the RMB exchange rate. In 1997, some small and medium-sized financial institutions began to have payment problems. In recent years, they used deflationary opportunities to increase refinancing, helped local governments to close down some small and medium-sized financial institutions, and maintained financial stability and social stability. RMB exchange rate stability not only in Asia to make a contribution to the economy and the world economy, also in line with our national interests, in recent years the balance of payments equilibrium, the state foreign exchange reserves continued to increase. The fourth is to basically realize the transition from direct regulation to indirect regulation of monetary policy. In 1998 cancellation of loan quota. In the past few years after the control, open market operations have actually become the main tool for the daily operation of monetary policy.
China’s monetary policy tools
Open market operations
It refers to the central bank ’s policy of buying and selling government bonds to control the money supply and interest rate in the financial market.
Deposit reserve policy
It means that the central bank imposes a deposit reserve ratio on deposits of commercial banks, etc.
Central Bank Loans
It refers to the central bank to use monetary base to specialized banks, other financial institutions, in a variety of ways of financial intermediation general term.
Interest rate policy
Central bank ’s policies and measures to control and regulate market interest rates in order to influence the supply and demand of social funds.
It is a Short-term Liquidity Operation, it is used when there is a temporary fluctuation in the liquidity of the banking system.
2010s policy tools
As well as heralding a market-based approach, the system and its range of tools offers the central bank more autonomy to set policy and marks a significant change for monetary policy making in China. Starting in 2016, the People’s Bank of China has used a market-based approach involving closer management of liquidity in the banking system and an expanded range of tools, such as repos and lending facilities, to promote better capital allocation and guide market interest rates to more closely match People’s Bank of China objectives. The new tools allow the central bank to be more proactive and targeted in how it goes about handling monetary policy. The renminbi currency value is also heavily influenced by other government policy instruments such as capital controls and trade policy, for instance restrictions on the import of gold paid in dollars.
Policy objectives
Pan Gongsheng, deputy governor of the People's Bank of China, stated that the internationalization of the renminbi is a major highlight of China’s financial reform in the past decade. They have set new objectives on which to focus their new policy: first, to adhere to the "priority in national currency" and expand the cross-border use of renminbi; second constantly promote the convertibility of the capital account in RMB; third, consolidate the market base for the reform of the exchange rate commodification; finally, improve the macro prudential management framework.
