Reforms in China’s Monetary Policy Reforms in China’s Monetary
part of deposit will be withdrawn in cash, the loan-to-deposit ratio should
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part of deposit will be withdrawn in cash, the loan-to-deposit ratio should in fact be larger than 100 percent. Therefore the 75 percent loan-to-deposit ratio requirement should not have been met. However, the foreign exchange inflow from 1990s to 2011 drives commercial banks to purchase foreign exchanges from corporations and individuals, and the deposits created made up approximately 25 percent of the total deposit. So the requirement was met, and the problem hadn’t yet revealed itself. So the 75 percent loan-to-deposit ratio only reflects the fact that loans create 75 percent of deposit, while foreign exchanges create the remaining 25 percent. But since 2012, foreign exchange inflow has slowed down. Consequently, banks purchased less foreign exchange, and hence the loan-to-deposit ratio started to rise. But because of the influence of conventional monetary theory, loan-to- deposit ratio is still widely used. In order to meet the requirement and to grant loans to restricted industries, commercial banks created deposit through the shadow banking system. Different from the shadow banking in Western coun- tries that is a competitor to the conventional banking sector, China’s shadow banking system is in fact the shadow of conventional banks (a small part of them is the real shadow banking though). Banks classify the de facto loans as interbank transactions. Since the assets are not noted as loans according to the accounting standard, the 75 percent loan-to-deposit ratio is met. Of course, when the foreign exchange inflow slowed down and the shadow bank- ing system increased, the 75 percent loan-to-deposit ratio shows nothing but the fact that loans and shadow banking each create 75 percent and 25 percent of the deposits. The loan-to-deposit ratio, based on the conventional monetary theory, has to some extent given rise to the shadow banking, an unexpected consequence. It was meant to restrain the growth of money, but since commer- cial banks tried to bypass the regulation with the creation of shadow banking, the growth of money was in fact accelerated. In order to curb the growth, PBC has applied various macroprudential instruments, such as dynamic adjustment mechanism of the differentiated required reserve ratio, to manage the credit growth. The credit money theory has now made its impact; the supervisory institution is adjusting the calculation method of loan-to-deposit ratio and is considering withdrawing the requirement in the Law of Commercial banks when the time is right. According to the credit money theory, commercial banks make loans to expand their assets and create deposits, and the central banks create reserves deposited by commercial banks to expand assets. The public thought com- mercial banks hand in part of their deposits to the central bank as required reserves and there is an upper limit to the reserve ratio, as suggested by the conventional theory and the 75 percent required loan-to-deposit ratio. Introduction ● 3 But actually the required and excess reserves are both created through the assets expansion of central banks, and therefore the required reserves are only connected to the deposit numerically rather than theoretically. As the foreign exchange inflow surged after 2000, the People’s Bank of China (PBC) raised up the required reserve ratio to 21.5 percent, but it didn’t have the expected tight liquidity effect. The misunderstanding of required reserves resulted from the conventional theory was also one of the reasons of “fluctuation of money market interest rate” June 2013. When the com- mercial banks lent out massively, a large amount of deposit was created and people thought it could be counted to meet the requirement of required reserves. However, it was totally wrong. Commercial banks can only make transfer from the excess reserves account to the required reserves account, and such excess reserves can only come from the assets expansion of central banks. Commercial banks were misguided by the conventional theory and misjudged the liquidity situation, causing the interest rate of money market to surge. After the raise of required reserve ratio and fluctuation of money market interest rate, the academia and practitioners gradually came to accept the credit money theory. According to the credit money theory, I wrote Framework of Monetary Policy Operation under Structural Liquidity Deficit . I proposed that the central bank should create stable liquidity demand through required reserve ratio and provide liquidity through assets expansion, adjusting the interest rate of liquidity supply to manage the interest rate in the money market. Based on the framework, I suggested the path of evolution in regard to China’s monetary policy framework. When the amount of foreign exchange inflow is going down, the central bank should keep the required reserve ratio rel- atively stable and actively inject liquidity through open market operations and other monetary policy instruments, so as to secure the effectiveness and activeness of monetary policy. As the result of a basket of structural reforms, including exchange rate regime reform, the problem of imbalance was tackled since the current account surplus to GDP ratio was reduced to 2 percent in 2013. The foreign exchange inflow cannot make up for the structural liquid- ity gap so the central bank was able to actively manage the liquidity again. The PBC, while maintaining the relative stability of reserve ratio, was able to innovatively apply multiple instruments such as MLF (mid-term lending facility), PSL (pledged supplement lending), SLF (standing lending facility), SLO (short-term liquidity operation), relending, rediscounting, and targeted reserve ratio cut to provide liquidity to the market. Its capacity to adjust the liquidity of the banking system and money market rate has been strength- ened substantially. So far, the reform of monetary policy framework has been going well. 4 ● Reforms in China’s Monetary Policy According to the Impossible trinity theory, an economy cannot possi- bly have monetary policy independence, free capital flow, and exchange rate stability simultaneously. In order to transform China’s monetary policy framework, the central bank has to withdraw from regular exchange rate intervention. To complete the objective, it has to push for the reform of exchange rate regime to bring the rate to the equilibrium level. The equilib- rium level largely depends on the current account surplus, which is in turn determined by the saving-investment gap. Because the saving rate is affected by demographic structure and cultural tradition, etc., it is difficult to simply adjust interest rate and exchange rate if we want to counter the expectation of appreciation. Structural policies are required, and the adjustment of real exchange rate may also help. Since China’s growth rate of productivity is higher than other countries, the real exchange rate is constantly changing as well. I think the market mechanism will take effect through the adjustment of nominal exchange rate and wage level. Before the Lewis Point, a large amount of surplus labor would swarm to the tradable sector and suppress the wage hike. The Balassa-Samuelson effect would play its role after the Lewis Point is arrived, which would substantially affect the real exchange rate and counter the current account surplus and appreciation expectation. The current account surplus to GDP ratio was 10.1 percent in 2007 and has been down to 2 percent in 2013 and 2.1 percent in 2014. The views on RMB exchange rate have started to diverge, which means that it has been close to the equilibrium level, and a solid foundation for policy framework transformation has been laid. The portfolio of structural policies plus the dual adjustment of nominal exchange rate and wage level have also taken effect. The structure and content of the book are arranged as follows: tải về 1.53 Mb. Chia sẻ với bạn bè của bạn:
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