The Study On The Influences Of Central Bank Intervention On The Liquidity Of Commercial Banks In China

In recent years, China’s foreign trade has made rapid development. Funds outstanding for foreign exchange are increasing and have become an important factor to increase market liquidity. In order to recycle the excess market liquidity, the central bank was forced to take a series of sterilized intervention measures, such as raising the statutory deposit reserve ratio, large-scale issuance of central bank bills, continuing to take on the open market repo operations and so on. However, in2008, the sudden global financial crisis triggered by the U.S. subprime mortgage crisis brought great impact to China’s economy. Market liquidity changed rapidly and excess liquidity changed into liquidity crisis.In order to cope with the crisis, the Chinese government adopted a four trillion investment stimulus package, as well as some other stimulus.The central bank turn its policy from tightening monetary policy into a loose monetary policy, such as reducing statutory deposit reserve ratio, reducing the issuance of central bank bills in a large scale. These measures gave confidence in the stability of the market and played a significant role in promoting China’s economic growth rate, but these measures also brought some of the fallout, leading to an excess currency, serious inflation. Lack of market liquidity gradually changed into excess liquidity. To change these situations, the central bank changed back to the implementation of tight monetary policy, such as raising the statutory deposit reserve ratio. Even in June2011, the statutory deposit reserve ratio was adjusted to21.5%of the highest level in history. At the same time, the central bank also increased the repo efforts and the expansion of central bank bills issue size. But in the second half of2011, the international and domestic environment had undergone great changes. European debt crisis intensified, seriously affecting China’s foreign trade. Our market funds are tight, a large number of corporate was faced with difficulty for finance. The real economy continued weakness. Excess liquidity changed into lack of liquidity again. In order to improve the deteriorating situation, the central bank reduced the deposit reserve ratio, carried reverse repo operations on the open market and suspended the issuance of central bank bills at the end of December2011.It can be seen that interventions of the Central Bank changed mostly according to the changes of market liquidity. Market liquidity of China changed from surplus to shortage, from shortage to surplus, and then from surplus to shortage again. The central bank interventions also changed constantly. Central Bank uses interventions to achieve its policy goals through mobility conduction mechanism.The liquidity of commercial banks is an important link of mobility conduction mechanism. It is worth our study how muh impact Central bank intervention on commercial banks’liquidity and how different impact for different intervention measures. And studying the influences of central bank intervention on the liquidity of commercial banks can reflect the degree of shocks to commercial banks’liquidity for different intervention measures. The study is of great significance for central bank to formulate effective measures and minimize the shock to commercial banks at the same time, and how to improve liquidity management better for commercial banks at the central bank intervention. So the paper uses central bank intervention on the liquidity of commercial banks as the research object.Firstly, based on a review of domestic and foreign references, this paper analyzes the intervention of the central bank and three important interventions of central bank intervention-to adjust the statutory deposit reserve ratio, the issuance of central bank bills and trading of government bonds, then analyzes the impact of three interventions on the liquidity of commercial banks in detail with theory. Secondly, this paper empirically study the influences of central bank intervention on the liquidity of commercial banks in China by using the unit root test, cointegration test. Granger causality test and var impulse response function model, according to the monthly data from January2004to December2011.This paper empirically study the influences of central bank intervention on the liquidity of commercial banks in China by using the unit root test, cointegration test, Granger causality test and var impulse response function model, according to the monthly data from January2004 to December2011.The empirical results show that:the central bank intervention and the liquidity of commercial banks have causal relationship to each other; adjusting the statutory deposit reserve rate on commercial banks’ liquidity effect is the strongest and has the long duration; issuance of central bank bills on commercial banks’ liquidity effects is the weakest of the three, but relatively strong in the short term; the central bank’s measure of buying and selling treasury bonds on commercial banks’ liquidity effect is relatively small in comparison with adjusting the statutory deposit reserve rate. Finally, on the basis of the empirical results, the paper puts forward a number of policy recommendations on how to develop interventions for central bank and how to improve the management of liquidity for commercial banks.