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China’s Central Bank & Monetary Policy Implications for the Global Economy Presented by Louisa Chu Introduction Why is the Chinese economy important? 2nd largest economy Rapid economic growth rate Affects many other national economies Overview of Central Bank People’s Bank of China Created in 1948 Responsible for both Central and Commercial banking activities 1983 (economic reform) split off commercial banking and was legally proclaimed as the country’s central bank Important Functions Formulate & implement Monetary Policy Issue currency & maintain stable exchange rate Regulate financial markets Manage state treasury Conduct economic research & analysis Protect state foreign exchange & gold reserves Utilizes various instruments to stabilize the financial system Objective of Monetary Policy “Maintain the stability of the value of the currency and thereby promote economic growth” Done through various policy instruments: Reserve requirement ratio Base interest rate Rediscounting of loans Rules for central bank lending Open market operations Comparison with the Fed Similarities Create monetary policy Similar MP instruments Regulate financial institutions Advisory committee Perform economic research Must report to State Council through Quarterly reports Differences Independence of treasury from bank Is completely stateowned PBC not completely independent from government for important functions China operates bank-based system Interest Rates Bank lending industry is growing rapidly Too much credit growth could lead to non-performing loans Contradictory to efforts to increase consumption Recently raised lending interest rates Interest Rates Implications Increased savings Decrease in property development Decreased investment in financial securities, thus slowing maturity of global financial markets Negative effect on investors’ sentiments about future rates Appreciation of currency OMO & Reserves Further tighten money supply This year, issued over 600billion Yuan in bank bills & repurchase agreements Effective July, reserve ratio raised to 8% 150billion Yuan out of circulation Exchange rate policy contradictory to these market actions Exchange Rate “artificial” undervalued Pegged to dollar until recently Not controlled by market but through volatility of other currencies Import/export prices are not fair China’s mounting surplus Exchange Rate China’s reasoning: stability Devaluation since economic reform in the 1980s Do not care about other countries’ opinions or pressures Central bank’s objectives are not in line with the state’s Historical Exchange Rates Year Rate Year Rate 1970 2.46 1987 3.72 1971 2.267 1988 3.72 1973 2.04 1989 4.72 1974 1.84 1990 5.22 1975 1.97 1991 5.263 1976 1.88 1992 5.42 1977 1.73 1993 5.75 1978 1.58 1994 8.446 1979 1.5 1995 8.318 1980 1.53 2000 8.178 1981 1.75 2001 8.277 1982 1.93 2002 8.277 1983 2.8 2003 8.277 1985 3.2 2004 8.276 1986 3.72 2005 8.199 2006 8.037 Rate stated in terms of Yuan per US Dollar Historical Exchange Rates Annual Exchange Rate (Yuan/Dollar) 9.000 8.000 7.000 6.000 5.000 4.000 Rate 3.000 2.000 Year (1970 - 2006) 2006 2004 2002 2000 1998 1996 1994 1992 1990 1988 1986 1984 1982 1980 1978 1976 1974 0.000 1972 1.000 1970 Rate Future Predictions Central bank and government relaxing on exchange rate policy “Gradually retreat from active role in onshore currency markets to give market forces more say in setting Yuan’s price” Economy passing stage of “industrializing” to become industrialized and a world power Future Implications “fairer” world market True valuation of Yuan Access to China’s markets by outside investors Economic freedom for businesses and individuals Increased consumption & access to foreign goods Any Questions? Thank you