Reforms in China’s Monetary Policy Reforms in China’s Monetary

Preface
T
he history of China’s monetary policy is relatively short, if the com-
piling and publishing of monetary statistics in 1996 was considered 
as the starting point. Nevertheless, the progress of China’s monetary 
policy has made is quite evident in terms of the soundness of its framework, 
the operational philosophy, the art of policy actions, as well as the compe-
tence of monetary policy professionals. As a result, China’s monetary policy 
has come to attract wide attention and has even become a global focus. 
China’s monetary policy itself, of course, needs to be improved. With the 
transformation of economic development pattern, the deepening of economic 
opening-up, the growing influence of financial markets, and the advancement 
of financial innovation, the transmission mechanism of monetary policy has 
experienced a major transition as the environment confronting policy imple-
mentation changes fundamentally. Consequently, the conditions gradually 
disappear for the current money-supply-targeted monetary policy paradigm 
to play its roles effectively. Financial market development and financial inno-
vation both diminish the “measurability” and “controllability” of monetary 
supply as well as its “correlation” with GDP and price level. The corporatiza-
tion of major commercial banks has also altered the transmission mechanism. 
Therefore, serious consideration is needed for making adjustments. However, 
two major problems exist for the paradigm’s shift to interest rate-based: first, 
transmission through intermediary targets will inevitably encounter ineffec-
tive adjustments and declining policy effects, thus the malfunction of “instru-
ment rules” is not ultimately resolved in terms of either “quantity” or “price.” 
Second, China’s interest rate is not fully liberalized yet. Imperfect exchange 
rate regime, bank-dominated financial structure and market segmentation 
all restrain the interest rate from playing active roles. China’s monetary pol-
icy paradigm shift won’t progress as expected unless all the abovementioned 
problems are solved. 

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Preface
Faced with mounting challenges, China’s present monetary policy par-
adigm shift requires serious thinking. And monetary theory should be the 
starting point. For a long time, monetary theory has stayed away from the 
mainstream economic theories. The recent global financial crisis has posed 
new challenges to it. In this regard, the Reforms of China’s Monetary Policy: 
A Frontbencher’s Perspective by Sun Guofeng is the right book that explains 
China’s monetary policy from both theoretical and practical perspectives. 
People generally are reluctant to dig into monetary theory issues. Sun used 
to be my PhD candidate in the Institute of Finance and Banking, Chinese 
Academy of Social Sciences. He actually proposed his own credit monetary 
theory that is different from conventional monetary theories. Working with 
the monetary policy department of the central bank, Sun has always been 
in the forefront of the central bank’s monetary policy operations, hence his 
profound thinking and systematic understanding of China’s monetary policy. 
Based on this theory, he holds the view that banks’ lending behavior is not 
subject to their existing deposits, therefore the current loan-to-deposit ratio 
management should be adjusted or canceled. Meanwhile, the regulation over 
lending should be strengthened. His view has been testified by the facts that 
the People’s Bank of China (PBC) has adopted macro-prudential regulation 
to control the overall size of bank loans and the banking regulatory authority 
has adjusted the loan-to-deposit ratio against the background that China’s 
credit market experienced a rapid growth after the outbreak of the global 
financial crisis. Based on the theory of credit money, he proposed a frame-
work for managing structural deficit of liquidity, from which he mapped out 
the transformation path of China’s monetary policy framework. He points 
out that when foreign capital inflow dwindles, the central bank should main-
tain a proper reserve requirement ratio and inject liquidity into the economy 
simultaneously through monetary policy tools such as open market operations 
so as to uphold the effectiveness and proactiveness of the monetary policy. 
As a matter of fact, during recent years, the PBC has kept the overall reserve 
requirement ratio relatively stable, in which case the targeted reserve require-
ment ratio cuts have been introduced and various liquidity-supplying tools 
have been created, such as medium-term lending facility (MLF), pledged 
supplement lending (PSL), standing lending facility (SLF), and short-term 
liquidity operations (SLO). The above operations of the PBC, which are 
roughly consistent with the transformation path put forward by Prof. Sun, 
have played a significant role in implementing monetary policy and promot-
ing the reform. This book is a collection of Mr. Sun’s thinking about mon-
etary theory, monetary policy, and the policy of RMB exchange rate, and a 
review of China’s monetary policy strategy as well. As China makes great pro-
gress in economic development and becomes increasingly important in the 

Preface
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world, the research of China’s monetary theory and monetary policy should 
also play its due role. I believe that this book, which contributes to a better 
understanding of China’s financial and monetary policy, would be a good 
reference to researchers and practitioners who are engaged in the research of 
monetary theory or interested in China’s monetary policy. 
Vice President Li Yang 
Chinese Academy of Social Sciences 
December 2014 

Introduction
I 
have worked at the Monetary Policy department in the Central Bank 
of China since 1996 at the frontline of monetary policy and worked 
with my colleagues to design and implement the reforms of open market 
operations, RMB exchange rate, monetary policy framework, and so forth. 
From the perspective of a frontbencher, I have been pondering over China’s 
monetary policy reform and drafted a number of papers. Reforms in China’s 

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