Analysis On China's Monetary Policy Validity

This article, from theory and practice, focuses on validity of China's monetary policy with element analysis, aiming at discussing operation laws of monetary policy in special financial environment of China, analyzing factors affecting the effectiveness of monetary policy, and exploring some effective measures choices for improving validity of monetary policy in China. 1.Views of Validity of Monetary Policy In macro-theory of regulation and controls, research on validity of monetary policy refers to, whether monetary policy can affect operation of realistic economy and finance, direct the reasonable flow of social capital, improve the validity of resource distribution, and realize the targets of regulation and control in specific economic environment with specific monetary policy tool and different conduction mechanisms. In west economic circle, the discussion about validity of monetary policy can be divided into Keynes school, rational expectation school, public choice school, new institution school and West Germany school. Different schools and the same school at different developing stage have different views. The Chinese economic scholars think there are two means on validity of monetary policy research: one is to investigate the validity of monetary policy in operation of macro economy, the other is to analyze validity of monetary policy from the view of microcosmic. Research at home and broad reviews that validity of monetary policy and sensitive degree of the controlled money to monetary policy, is relative to economic development, and the validity of monetary policy depends on the function and environment of monetary policy. 2.Operating Environment and Validity of Monetary Policy In realistic economic operation, the monetary policy is carried on under certain macroeconomic background and market condition, and the analysis on validity of monetary policy can't break away from the running environment of the monetary policy. From the view of current financial condition and the background of China's financial structure change, the lagging of monetary policy, unbalance of financial market, save-investment structure, and economies open to outside becomes the direct factor of lowering the validity of monetary policy. The influences of the operating environment on validity of monetary policy can include: a. With historical changes of China's financial structure, financial structure has an increasing influence on the monetary policy, the forming of effective investment meets difficulties and the appearances and growth of new enterprises can't obtain sufficient financial support, resulting in capital depending on banking. b. With the non-balanced development of financial market, money market and capital market that act as the monetary policy, don't function well, credit financing and securities financing can't be complementary in advantages, state-owned bank highly monopolize, and small and medium-sized enterprises meet difficulties in loans. c. With great changes of the pattern of the deposit, savings can hardly change into investment, resulting in the bad circulation of "high saving-high loaning -high accumulating-high lost-low profit", which enlarges interference effect of monetary policy. d. Low interest rate, twisted interest rate structure, and the non-marketing form of interest rate result in the interferences of unbalanced system of interest rate, lower credit of market interest rate and limitation of government regulation. e. Because of the extension of opening policy, conflicts of target between inside and outside, currency substitute and capital flight are more severe, overflowing effect of international monetary policy are increasing, and the dependency of monetary policy is decreasing. 3.Final Targets and Validity of Monetary Policy The choice and forming of monetary policy target in western countries have roughlygone through three periods: the single target (take full employment as the core ) , many targets (full employment , economic growth , stable price, balance of payments), and back to single target (focusing on stable price). China's monetary policies also experiences from economic system reform to economic development in the initial stage of the 1990s, and monetary policy changes from stabilizing the target of money value to keep the value of money stable after the 1990s. At current situation, China should insist the value of money for the final target of monetary policy, which is to promote economic growth. The scope of stable value of money is 1-5%, the median value is 3%, fluctuating 2 percentage. It is more suitable to take consuming price and retail price as the checking target of regulating and operating monetary policy, and to take purchasing price as the warning target of measuring our country's monetary policy. 4.Intermediary Target and Validity of Monetary Policy It should meet measurability, controllability, dependence in order to make intermediary target reflect the effect of the monetary policy. In addition, the Central Bank should also consider two following factors while choosing intermediary target: First, certain anti-interference; Second, better adaptability with the economic and banking system in this country. The choice of intermediary target of monetary policy in western countries, tell us establishment of intermediary target is a progressive and variable course. Therefore, it is necessary to regulate according to environment. Our country's monetary policy has taken quantity of money supply as intermediary target. China is in a very awkward condition of choosing intermediary target of current monetary policy. On one hand, the suitable intermediary target of the money supply is dropping constantly; On the other hand, there is no more suitable index to replace position of intermediary target of monetary policy. The author also thinks, under current economic and financial situation, money supply is more suitable than others to be country's intermediary target of monetary policy, and it isnecessary to monitor interest rate, scale of credit, inflation rate etc. Our country should do more research on intermediary target of monetary policy in order to take other variable as intermediary target at right time. 5.Choice of tools and Validity of Money Policy Tools of monetary policy in China generally include deposit reserve system, open market business, rediscount, interest rate control, re-loan etc. In the long run, the whole trend of the monetary policy tool is transforming from the direct regulation and control into indirect adjustments and controls. In transitional economy, the traditional planed monetary policy has already lost efficiency and been abandoned. The development of the financial market lags behind, interest rate hasn't completely marketization. The market scale of rediscount and open market operation is still very small. The main tool of monetary policy, such as re-lending, deposit capital reserve, interest rate system and window guiding policy, have the branding of concentrating fund. The monetary policy tool has the limited effects to promote the economic growth and stimulate investment and consumption. 6.Conducting Mechanism and Validity of Moneytary Policy Conducting channels of monetary policy in macro-economy consist of interest rate conducting channel, assets price conducting channel, credit conducting channel and exchange rate conducting channel. According to changes of the conducting mechanism of monetary policy in other countries, the function of interest rate is becoming greater and greater, and becomes the main conducting channel. From the practice of monetary policy in China, the conducting mechanism of the monetary policy has already obviously restricted the improvement of monetary policy validity. The factors restraining the conducting mechanism of monetary policy includes transitional pressure, postal reform, limitation of micro-behavior, imperfect social credit, and narrow financing channel for small and medium-sized enterprises. According to the problems andcurrent situation of conducting mechanism of monetary policy in China, to improve the validity of monetary policy depends on further development of financial market, reform of interest rate market and perfecting bank system. 7.The Monetary Policy Effect Closely Related to Open Economy Proved and analyzed by theory, under open economy, exchange rate fluctuation, balance of payments, foreign exchange reserve fluctuation and supply of domestic currency form close direct relations. From the point of view of monetary policy validity, the money supply that the Central Bank regulates directly is determined by many factors, such as Central Bank, commercial bank, storing fluctuation etc. Among them, the export-oriented economic variable has already become the important factor of restricting monetary policy validity under the open economy. Under the open economy, factors restricting the validity of monetary policy of our country include independence of monetary policy, the increasing endogeny of currency supplies, the omission of the effective monetary policy tool, the changes of function mechanism of the monetary policy, the weakening stability of intermediary target, the aggravation of currency substitution, the overflowing effect of monetary policy and the strengthening unsymmetric effect on China's capital flows. With the further opening to the outside,conflicts between inside and outside the open economy limits the validity of monetary policy of our country. The conflicts result from disharmony between rigid exchange rate system and home currency and foreign currency policy, and quicken the exchange rate reform, harmonizing home currency and foreign currency policy, actively taking part in the coordination of international monetary policy. 8.Examining the Validity of the Monetary Policy with Experiences Judging the basic relation between money and output since the reform, M0,M1 and M2 can transform each other ,and the mutual substitutability among every level currency is strengthened with finance innovation. Influenced by real...