III. Monetary Policy Operation Framework—The Central Bank’s

50
●
Reforms in China’s Monetary Policy
core enables different monetary policy instruments to be included in a uni-
fied and logically analytical platform. Figure 1.4 is a simplified balance sheet 
of a central bank:
Spontaneous assets refer to assets that are not controlled by the central 
bank. Or although they are controlled by the central bank, they are not traded 
to achieve the monetary policy target. Policy assets refer to assets traded by 
the central bank to realize the monetary policy target. 
Under a liquidity management framework based on a liquidity deficit, 
because the central bank needs to continuously increase the supply of liquid-
ity to balance demand and supply, injecting liquidity is a major aspect of 
daily operations for central banks in developed countries. It can be seen from 
Figure 1.4 that an increase in reserves supplied by the central bank is reflected 
in an increase in the assets of the central bank, for which specific methods 
include purchases of foreign exchange, extension of relending and rediscount 
to commercial banks, purchases of treasury bonds or other bonds in the open 
market, and temporary purchases of bonds under repo agreements (hereinaf-
ter referred to as “reverse repos”
20
).
21
The key for the central bank to accurately control the supply of reserves 
lies in enhancing the exogeneity of reserves supply, which largely depends on 
the exogeneity of central banks’ assets. Due to the fact that government bonds 
have the strongest degree of exogeneity, most central banks in developed 
countries increase their assets by purchasing bonds to increase liquidity. 
In the traditional monetary policy operation methods, the central bank will 
provide relending and rediscount to change the level of liquidity among commer-
cial banks, for which the trading instruments are claims and debts between the 
central bank and commercial banks. In the open market operations, the trading 
instruments of the central bank include treasury bonds and other bonds, which 
Spontaneous Assets
Liabilities to Commercial Banks
1. Required Reserves
2. Excess Reserves
3. Central Bank Bonds
Capital
Liabilities to Government
—Fiscal Deposits
Liabilities to General Public
—Cash
Net External Assets
Claims on Government
Claims on Commercial Banks
Claims on Government
– Government Bonds Purchased in
the Open Market.
1. Loans
2. Re-discount
Fiscal Borrowing and Overdraft
Policy Assets
Foreign Exchange Reserves of
Central Bank

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