International Capital Flows And Monetary Policy In China

Since the reform of RMB exchange in 1994, China’s economy has been growing rapidly, attracting more and more foreign investment into China. China’s international balance of payments continues to maintain Double Surplus (current account surplus and capital account surplus). The central bank of China use strict exchange system to manage foreign exchange. So, the foreign reserve of the central bank has been growing fast. In 2006 the amount of foreign reserve in China exceeded Japan and became the world’s largest. In order to avoid influence caused by large fluctuations on the foreign exchange market exchange rate on the domestic economy, the People’s Bank of China has been implementing the floating exchange rate system based on a basket of USD-leading currencies, and the People’s Bank of China has been implementing positive policies on the foreign exchange market. But the expansion of China’s foreign exchange reserves, led directly to the growth of the supply of China’s base money, and brought a lot of pressure of inflation to the domestic economy. Therefore, the People’s Bank of China has to use monetary policies to write off the growth of monetary caused by the foreign exchange reserve.This paper introduces the basic situation and history of China’s sterilized foreign exchange intervention in four periods. Then this paper uses BGT model to analyze the degree of the sterilized foreign exchange intervention of the central bank of China. The results show that the coefficient that tells the influence of the floating of capital on China is -0.27, meaning that the regulation in China on floating capital is strict. The coefficients that tell the ability of the sterilized foreign exchange intervention of the central bank of China have been changing structurally. In the end, the paper also does empirical tests according to different sources of the foreign exchanges.