An Analysis Of China’s Sterilized Intervention And Its Cost

Since we integrated the two-track exchange rate in1994, the international balance ofpayments surplus grew in high speed, so China accumulated a large number of foreignreserves. As the foreign exchange reserves keeps widening, it brought tremendous pressure onRMB appreciation. In the view of China’s current foreign exchange management system, thefunds outstanding and money supply increased too much, as a result of China’s inflationarypressure grew increasingly. In order to curb inflation, and keeping interest rates and exchangerate stability, the PBC has implemented sterilized intervention to ensure the macro-economymove normally. Given that China’s foreign exchange reserve scale was not huge in the1990s,the strength of Chinese central bank sterilized operations was limited. Since the beginning ofthe21st century, the foreign exchange reserve scale grew more rapidly, particularly after2003,the frequency and strength of sterilization on the rise. The Chinese central bank has adoptedthe issuance of central bank bill, and raised the deposit reserve requirements to hedge thefunds outstanding since2003. With the intensity of intervention has deepened more and more,the problem of the cost of sterilization draw large attention to many scholars.The thesis took the huge change in the foreign exchange reserves after exchange-rateregime reform in1994as the cutting point of discussing the need for sterilization. The paperintroduced the major monetary policy instruments in our country, and reviewed the practice ofsterilization of China. This article insists on the research method of combining quantitativeanalysis with qualitative analysis to discuss the cost of sterilization after2003, which basedthe fact that the strength of sterilization was increasing.The paper is divided into five parts. Chapter one presents the research object, theory andpractical meaning of this dissertation, the current situations in and out of China and theresearching approach of the essay. Chapter two introduces the meaning of the sterilization, themajor monetary policy instruments in our country and the need of sterilization. Chapter threereviewed the practice of sterilization of China, and Chapter four analyses the financial costs,the opportunity cost and the cost of economic distortions since2003. On the basis of analyses the costs of sterilization, I conclude that the costs are too expensive and the sterilization is notsustainable. In the last part of this paper, I put forward some suggestions to reduce costs.