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An Analysis of the Transmission Mechanism for China’s Monetary Policies (Excerpts)
2004-09-11
Xia Bin
Research Report No 074, 2004
From the phenomenon of noneffectiveness of the transmission of monetary policies appearing in China in recent years, I am of the opinion that there are mainly six factors that affect the current transmissive noneffectiveness of China’s monetary policies: the continual increase of the possession of foreign exchange, restriction of the present profit-making pattern of state-owned commercial banks, pressure of dealing with historical bad debts and the system changing to another track, the disequilibrium of excess reserve of commercial banks, and the insufficient development of the financial market, etc. In recent days, choices should be made as occasion demands according to market principle to conscientiously and earnestly push forward the controllable floating exchange rate policy so as to enhance the independence of the monetary policies of the central banks; and continue to carry out properly tight monetary policies in compliance with the policy measures of other government departments. Where further efforts should be made in favor of the China’s medium-term and long-term monetary policies includes:
I. Medium-term Policies
1. Financial reform should be accelerated. Bad debts accumulated for years by part of the institutions should be settled the soonest possible and sensitive subjects that can be regulated with skill by central banks should be nurtured. Innovations and reforms should be accelerated of the banking business, proportion of the interest differential in business income should be reduced, and the sensitivity of interest rate regulation should be increased.
Clearing payment system should be improved to enhance the mobile management level of the commercial banks. Development of the variety of salable financial tools (Proportion of the bonds held by commercial banks should be enlarged and accomplishment of the asset turning into securities should be carried out as soon as possible.) to enhance the transmissiveness of the bond market to credit market on the whole. Bank money market fund account should be developed to reduce the pressure of banks’ capital sufficiency rate, thus further promoting the course of marketization of the deposit and loan interest rates.
2. Reform of the social security system should be quickened and the residents’ worries about the decline of anticipation of the residents’ income should be dealt with so as to increase the wealth effect in the monetary policy transmission mechanism.
3. Interest rate marketization (the focus is the marketization of the deposit interest rates) should be promoted in a steady and continual way, but at the same time the interest rate hedging business must be developed to lighten the pressure of interest rate risks of the commercial banks after marketization of the interest rates.
4. Excess mobility accumulated over the years on the market should be withdrawn in an ingenious and gradual way so as to improve the sensibility of the monetary policies. It should be seen that there is spare effort to dig out in this respect. In 2003, all China’s bank reserve funds, cash receivable, and dealings between banks accounted for 12.49%. The similar index for all American banks before 1960 was 20% and dropped to 6% in the mid-1990s.
II. Recent Policies
1. Choices should be made as occasion demands according to market principle to conscientiously and earnestly push forward the controllable floating exchange rate policy, so as to enhance the independence of the monetary policies of the central banks.
2. Properly tight monetary policies should be continually carried out in compliance with the policy measures of other government departments. Nevertheless, the following points must be well dealt with:
First, it should be seen that in the course of the regulation the focal points and the measures of part of the industries and regions are mainly the limitation on aggregate and quantitative measures.
Second, the starting point for the Discriminatory Deposit Reserve Fund is positive, but the role of the limited scope of implementation is rather limited. Therefore, with the financial reform going deep, chances should be chosen to decide upon the scope of use for the Discriminatory Deposit Reserve Fund Rate, so as to bring it into real play.
Third, interest rate on excess deposit reserve fund rate should be brought down gradually till zero to enhance the sensitivity in the regulation by the central banks.
Fourth, interest rate expectancy of the money market should be guided in a correct way to enable the moves of the market interest rates to reflect the intentions of the monetary policies as much as possible for a certain period of time. As a result, within a short period of time, making public of the price tenders that are opposite to the policy intentions unsuitable for frequent and alternating use of market operations disrupting expectancy of the financial institutions will eventually affect the target of regulation policies laid down by the central banks.
Fifth, advantages and disadvantages of the interest rates, exchange rates and reserve fund measures should be further studied profoundly. When the economic overheat is hard to curb, and the role of interest rates and reserve fund measures is hard to put into practice, though the stability of exchange rates should be emphasized, the necessity and possibility of the adjustment of the exchange rates to a certain extent under certain circumstances cannot be given up completely.
May 2004
