Length Of Service Of General Monetary Policy And Its Financial Market Conditions

On January 1, 1998, China eliminated the credit scale control policy. This was a decisive step China took in changing the macroeconomic control measures from direct ones to indirect ones. It made Ordinary Monetary Policy Instruments (OMPI) became much more important than before. This dissertation discusses the problems existed after the introduction of OMPI and corresponding measures. The dissertation is divided into four sections. Section I discusses the main contents and characteristics of OMPI and their transmission mechanisms. Monetary policy instruments have two broad categories, one is Ordinary Monetary Policy Instruments (OMPI), which include Reserve Requirements, Rediscount and Open Market Operations, the other is Optional Monetary Policy Instruments, which include Direct Credit Management, Indirect Credit Management, Consumption Credit Management and Securities Market Credit Management. The effect of central bank use of OMPI depends on economic entities?internal motive of chasing profits and is the combined result of Portfolio Adjustment Effect, Asset Allocation Effect and Rational Expectation Effect. Section II discusses the introduction and reform of OMPI in China. China began to use Reserve Requirements as early as 1984 when the People Bank of China (PBC) took the function of central bank. But before the 1998 reform, the main purpose of Reserve Requirements was to centralize funds. Only after the 1998 reform, did the Reserve Requirements become a real monetary policy instrument. In 1994, PBC began to have pilot programs on Open Market Operations, starting from Foreign Exchange Open Market Operations, followed by Central Bank Bills Open Market Operations and Treasury Bills Open Market Operations. But because of the scale is very small, the effect is very limited. China began to use Rediscount Policy in 1986, but because aw of Bills of Exchange came into effect as late as 1996 and the total number of bills of exchange in circulation was very small, the Rediscount Policy was only able to play a very limited role. Section III discusses the necessary financial market conditions for introducing OMPI and the existing defects for the time being. Because the effective implementation of OMPI is based on the market mechanism, one of the prerequisite of the use of OMPI is a developed financial market, especially a money market with a certain degree of depth, width and resilience. Specifically, if the central bank wants to use OMPI to adjust the macro economy, the interest rate must be liberalized and can reflect the demand and supply situation in the market; there must be a standardized interbank borrowing market; there must be a treasury bills market with a certain scale; there must be a developed bills of exchange market. Only with these conditions fulfilled, can the central bank use the OMPI effectively and achieve the macroecnomic objectives. Ever since the beginning of the reform, we have adjusted the deposit and loan interest rates many times to accommodate the needs of the development of market economy. But because the interest rate is still controlled by the State Council through the People Bank of China, there are many disadvantages in the current interest rate management system (for example, the adjustment of interest rate is lagging behind need of the economy and is inflexible at all, and the interest rate structure is distorted). In the a...