System Of Chinese Monetary Policy

The monetary policy plays an important role in the macro economic control. No matter the economic policy of Keynes, predominated before 70s'of 20th Century, nearly 40 years ago, which attempted to solve the issue of deficiency of effective needs through increasing the government expenditure, finally leading to"stagflation", or the Western Intensified Financial Budget Restriction,which was implemented during the late 1980s, emphasizing the use of monetary policy to achieve the macro economic control and taking it as the main objective of the monetary policy to control the inflation. Both of them are based on the economic situation at the time to explore in terms of theory. These theories had been welcome by various countries and were well implemented.The monetary policy system is the basis for the formulation and implementation of the monetary policy. It will not only determine the behavior of the formulator of the monetary policy, but also decide the target delivery and operation in the process of monetary policy implementation. The monetary policy is one of the important aspects of macro economic control policy. It does mean that the central bank of a country(or called competent monetary agency), provides policy guidance and takes relative measures to carry out the adjustment and control of some economic indexes such as the quantity of currency supply, interest rate and exchange rate in order to realize certain macro economic goal.The framework of monetary policy aims to utilize the monetary policy tool sto achieve the operation target of the monetary policy, by which to reach the intermediate target, so that to reach the final goals of the monetary policy.The thesis is divided into five chapters. Chapter One firstly presents the concept of the framework of the general monetary policy system, discusses the universality of the monetary policy system. Chapter Two argues that the beginning and development of economic theory follow with the development of economic regime and the development of economic situation by ways of combining the economic theory with the history of world economy. Chapter Three analyzes the experience and lessons of the national monetary policy of United States of America, European countries, Japan and some developing countries. Chapter Four analyzes in detail the practice of the Chinese national monetary policy after China opened its door to the outside world, discusses the special economic conditions of China. Chapter Five propose the establishment of the framework of monetary policy system of China.In Chapter One, in light of universality of the monetary policy system, it includes policy goal, policy tool, intermediate target, conduction mechanism, monetary policy codes and so on. The policy goal includes economic growth, currency stability, full employment, balance of payments, economic structure adjustment. The general policy tool includes deposit reserves, rediscount rate, open market operation, and selective monetary policy tool with consumption credit control, securities market control, real estate credit control. Direct credit control tool includes the set highest deposit and loan rate, credit allocation and liquidity ration of the commercial bank and so on. The indirect credit control which has been used more often by the Central of Bank of various countries is"window guidance". The intermediate target includes interest rate and money supply. The conduction mechanism includes that of interest rate, treasures and asset price and exchange rate. Most of countries choose the monetary policy rule discretionarily. Among them, there are Taylor Rule, which attaches importance to the interest rate, and McCallum's rule, which gives importance to the basic currency and nominal GDP. The framework of monetary policy is the inflation targeting, which takes a certain ratio of inflation as its goal and is disclosed to the public.Chapter Two analyzes the monetary banking theory and policy of various schools and different periods and argues that we should look at the establishment and application of these theories from the historical point of view. It is found out that the reason for the establishment of each school of economics had closely related to the economic conditions at the time. In order to solve the difficult issues of economy the governments faced, the economists, based on the previous theoretical achievements, further improved and set up new economic theory. Therefore the monetary policy of China should base on the characteristics of its own economic conditions to find the solutions to the difficult issues of economy facing China and explore the monetary policy system which is appropriate to the economic conditions of China.In Chapter Three, we have learned and been enlightened from the practice of the monetary policies of foreign countries. The American monetary policy has changed greatly. Its focus various from period to period, therefore the choice of intermediate target is also different. While the economy is prosperous, the free economic policy would be implemented. When there is an economic crisis, there would be no doubt that planned economic policy would be taken in order to avoid the occurrence of series problems brought about by the depression of the economy. the Japanese economy relies heavily on foreign trade, which is very susceptible to influence of the foreign economic environment,therefore its monetary policy oriented on the foreign trade, relying the economic environment of foreign countries. The European Central Bank has paid attention to the contribution of the economic information to the formulation of the monetary policy. When there is change in the economic condition, the monetary policy also changes. The monetary policy of the developing countries adapts to the changes of its industries. They make more often the use of the maximum allocation of the credit and the legal reserve ratio as its monetary policy tool, aiming at realizing its goal of the economic development.In Chapter Four, after reviewing the process of practice of the monetary policy implemented under the early stage of market economy based on state-owned socialist system, we could find out the eminent characters of the Chinese monetary policy, multi-targets and special nature of the conduction mechanism of the monetary policy as well as instrumental diversity and special nature of the effectiveness assessment. The fundamental reason for the special nature of Chinese monetary policy is that the Chinese economy has been experiencing the transition period of economic regime, and the national economy has mainly depended on state owned enterprises, the banking system on state owned banks. Due to the multi-targets of the Chinese monetary policy, it is not possible to compare the effectiveness of the policy goal evaluation with that of evaluation of a single target. Since the implementation of its open door policy, from the facts of the economic development, employment, currency stability and payment of balance achieved by the Chinese People's Bank since it carries out its function, we could conclude that the choice of multi-targets of the monetary policy is a must and has obtained effective results. The economic condition decides the choice of monetary policy system. The reason for the difference of Chinese monetary policy with that of foreign countries is not only because China is just in the transition process of its economic regime but mainly because of its special economic conditions. The Chinese economy has had the state owned enterprises of socialism as its main thrust, the banking system has the state owned commercial banks as their thrust, the way of finance is mainly indirect. The issue of overall volume of supply will co-exist with that of structure for a comparatively long period, and could be the cause and result with each other. The main character of the Chinese economy in operation will be the diversity and easiness to change.Chapter Five discusses about the choice of monetary policy system. The monetary policy goal is determined by the overall economic development goal. As a developing country, the economic goal of China is the development of economy. Money stability is the basis for the development of economy, harmonized economic structure is the guarantee for the economic development and ensuring employment is the fundamental basis of livelihood to improve living of Chinese people and evolve to harmonized society. The balance of payment is an important condition for China to keep balanced development home and abroad. During the early stage of Chinese market economy, the interest rate is the monetary policy tool used by the central bank to directly control and adjust the economic development. In the process of development of the market economy, the People's Bank of China gradually develops and formulates its own benchmark interest rate through opening market business and rediscount business.The quantity of money supply and credit target is in accordance with the requirement of intermediate target, and therefore they are still the important intermediate target of monetary policy. The conduction mechanism of Chinese monetary policy is credit and loan oriented and it may change to interest rate conduction mechanism oriented with market-regulated interest rate. The Chinese monetary policy has the comprehensive character. In light of the actual condition and practice of China, it is appropriate for China to take the nominal GDP as its economic development goal, with the interest rate as its direct adjustment and control measures and indirect adjustment and control of the money supply. The inflation target is also within the plan of the People's Bank of China, if it is beyond the"nominal anchor", actions will be taken to stop the inflation and deflation. Therefore, the monetary policy of China is a comprehensive one with the Chinese character. The main conclusions of the thesis are as the following.1. Through the analysis of monetary and banking theories and policies of different schools, we should look at their establishment and application from historical point of view. It is found out that the reason for the establishment of each school of economics had closely related to the economic conditions at the time. In order to solve the difficult issues of economy the governments faced, the economists, based on the previous theoretical achievements, further improved and set up new economic theory. The monetary and economic theories of the developing countries are more close to the actual situation of Chinese economy. While applying these foreign economic theories, we could avoid mistakes if we pay more attention to the environment of these theories and their applicable conditions.2. After reviewing the process of practice of the monetary policy implemented under the early stage of market economy based on state-owned socialist system, we could find out that the root cause of the specialty of the Chinese monetary policy stems from the Chinese economic environment, the state owned enterprises being dominated in the national economy, the non-state owned enterprises developing rapidly. The big gap between different regions in the country has limited the implementation of the overall monetary policy. Due to the dual functions of the state owned enterprises, namely the economic function and social function, the policy of macro-control is therefore multiple. The monetary policy targets must also be multiple including the stability of the money value, economic development, full employment, balance of payment and economic structure adjustment.3. By analyzing the economic and monetary policies of America, Japan and European countries, we could find out that the content of the monetary policy varies from country to country, all of them has developed the monetary policy system which is in accordance with the need of economic development of its own country.4. The monetary policy system of China is the reflection of the economic character of our country. In light of actual economic conditions and practice of our country, the national economic is dominated by the state owned enterprises, different ownership regimes co-exist, the gap between regions is big and this situation will remain unchanged for a long period of time in the future. The complicated economic environment of China has decided that its monetary policy is multi-targeted. It also decides that the conduction mechanism of monetary policy is multi-channeled and multi-intermediate target, therefore the monetary policy tool is different from that of foreign countries. The monetary policy rules has integrated the merits of various different rules, choosing the relevant one which is appropriate to China. 5. Evaluating the effectiveness of monetary policy of our country with Western monetary theory reflects weakness of the monetary policy of our country, tightness considered over-endeavored and expansion considered less-endeavored and strong in terms of time lag. However, weak or strong effect of the monetary policy depends on the conditions under which it exerts influence, not on the monetary policy itself. Therefore, in order to upgrade the effectiveness of the monetary policy, we much create very well outside environment on one hand, and need to set up effective monetary policy system appropriate to the Chinese actual conditions.6. The monetary policy of the developing countries adapts to the changes of its industries. They make more often the use of the maximum allocation of the credit and the legal reserve ratio as its monetary policy tool, aiming at realizing its goal of the economic development.7. Economic conditions decide the monetary policy system. The monetary policy target depends on the overall goal of the economic development. As a developing country, Chinese long-term goal is to develop economy. Stabilizing the money is the basis for economic development and the coordinated economic structure is its guarantee. Increasing employment is the fundamental basis of livelihood to improve living of Chinese people and evolve to harmonized society. The balance of payment is an important condition for China to keep balanced development home and abroad. During the early stage of Chinese market economy, the interest rate is the monetary policy tool used by the central bank to directly control and adjust the economic development. In the process of development of the market economy, the People's Bank of China gradually develops and formulates its own benchmark interest rate through opening market business and rediscount business. The quantity of money supply and credit target is in accordance with the requirement of intermediate target, and therefore they are still the important intermediate target of monetary policy. The conduction mechanism of Chinese monetary policy is credit and loan oriented and it may change to interest rate conduction mechanism oriented with market-regulated interest rate.