Probable Choices Of China's Monetary Policies In The Context Of Lasting Trade Surplus

Global economic imbalance, the key characteristic of the current global macro economy, is featured by the substantive deficit of US current account and the huge amount of surplus of Asian emerging countries represented by China. Especially in recent years, the continuous Twin Surplus in China has brought it into sharp focus of global imbalance. In this context, however, China's monetary policies are facing unprecedented challenges. Therefore, it is of great importance to analyze the all aspects of difficulties that China's monetary policies are facing and to discuss the probable choices of monetary polices.The thesis follows the writing model of problem raising, literature review, theoretical analysis, empirical testing and finally policy proposal. In the first half of the thesis, the problem is put forward, and relevant literatures are summarized, followed by a preparatory analysis of China's monetary policies. After that, we come to the key parts of the paper, where the independency and efficiency of the monetarey policy when facing the lasting trade surplus are fully discussed and finally we raised some of the probable ways to solve the problem. The paper is composed of seven chapters with the key points of each chapter as following:Chapter one gives an introduction on the research background, methodology and the approaches followed in this thesis.Focusing on both foreign and domestic literature review, chapter 2 is composed of two parts. Part one is about the theories of current account imbalance, including the cause of formation of current account imbalance, its sustainability and the adjustment method. Part two will focus on the research of monetary policies. Although there are an overwhelming number of books and papers involved this topic, in China, most of the research in this field is limited within empirical testing and is mainly concentrated in testing the efficiency of monetary policies.In chapter3, the thesis gives an introduction and preparatory analysis on the current situation of China's monetary policies, which is helpful to the further analysis on the dilemma China's central bank is facing. Generally, the monetary policies include four key factors: the end-alls, the intermediate targets, objects and instruments, but in an open economy, exchange rate policy and policies on the capital account are of the same importance as the previous ones.It is obvious that the disequilibrium of Balance of Payment has forced RMB to appreciate, while it still needs further examine to evaluate its impacts on both independency and efficiency of monetary policies. Therefore, the challenge from Balance of Current Account Disequilibrium that China's monetary policy confronts should be thoroughly analyzed in the following two chapters.As for the independency, which is the main topic for Chapter 4, the thesis reaches to a conclusion that the monetary policy is more passive compared with before and its independency is largely injured.As for the efficiency, the research should be conducted from two different angles. On one hand, because of the high costs and other reasons, the sterilization of the monetary impacts is not sustainable. On the other hand, the disequilibrium restricts the use of anti-inflation measures. To conclude, given the global economic imbalance and the current situation of China's monetary system (including the exchange rate system), the instruments available for central bank are highly limited and the expected targets of monetary policies are hard to be achieved.To summarize, the research tells that both independency and efficiency are weaken are mainly because of two reasons: the disequilibrium of balance of payment and the lack of elasticity of current monetary system (the exchange rate system mainly) .Chapter 6 focuses on the probability of adjusting the disequilibrium in the frame of monetary policies. Whether the adjustment of RMB and China's domestic interest rate can obviously improve the disequilibrium is fully discussed from the aspects of the exports structure, international experience and statistical analysis. In China, more than half of the total exports are improvement trade, which is insensitive to changes in exchange rates. At present, China is experiencing a high economic growth, continuous trade surplus and potential RMB appreciation, which is quite similar to Germany in 70's and Japan in 80's in the last century. However, the experience of Germany and Japan showed that appreciation do not necessarily lead to the improvement in trade imbalance. Finally, a SVAR model is proposed to analyze how exchange rate will dynamically influence the trade surplus. To draw a conclusion, it is difficult to improve the balance of payment by exchange rate adjustments alone.In Chapter 7, the thesis raises both long term and short term choices of domestic monetary policies to solve the problems on above. Exchange rate policies, interest rate adjustment and restrict capital control are needed in the short term to ease the difficulties at present. In the long run, China should pursue a floating exchange rate system, a more market-oriented interest rate and an open capital account. Floating exchange rate and open capital accounts are very essential to improve the independency of monetary policy, while a market-oriented interest rate is the condition for a more effective monetary policy. Besides, the thesis also proposes three supporting measures: to set up a more efficient social welfare system, to reform the resources market and to encourage the environmental protection.