Economists focusing on the Chinese financial system have sought to understand the policymaking process of the People’s Bank of China (PBOC). Normally, we look at any given action by the PBOC as reported in the news and consider whether or not it is in line with what we already know about how the PBOC acts. However, this is not easy to understand when a new administration comes into the leadership and policy targets shift. With a more methodical approach, we may be able to gain a better understanding of recent PBOC policy.
We look at the PBOC announcements on the PBC website and in the news from the past year to see what types of policy decisions were made. We ask what decision was made, and why? Is the impact major (have a macroeconomic and lasting effect) or minor (having a small, localized or limited effect)? The following table is thus generated, in reverse chronological order.
|Date||Decision||Reason Given for Decision||Source/ Major or Minor?|
|3-14-2014||Expansion of the floating range of the RMB against the US Dollar||In line with Third Plenary decision to expand market reform; Allowing for greater volatility in the currency will allow the foreign exchange market to further develop||PBC Website/ Major|
|3-14-2014||Alibaba and Tencent ordered to temporarily halt issuance of virtual credit cards||To assess the risks of QR codes and these untested services||New York Times/ Minor|
|3-1-2014||Cap on interest rates of interest paid on foreign currency deposits in Shanghai Free Trade Zone removed||To prepare for further interest rate liberalization in the free trade area||SPS International/ Minor|
|1-10-2014||Originators of credit asset backed securities must retain a portion of the risk (at least 5%)||To regulate risk and protect interests of financial investors||PBC Website/ Minor|
|12-7-2013||Provisional Rules onManagement of Interbank Certificates of Deposit||To regulate interbank COD business||PBC Website/ Minor|
|12-5-2013||PBOC bans Bitcoin||To reduce risk since Bitcoin is “virtual good” rather than a currency||The Register UK/ Minor|
|12-2-2013||Financial support policies offered for Shanghai Pilot Free Trade Zone||To promote cross-border RMB usage, RMB capital account convertibility, interest rate liberalization and foreign exchange administration.||XBMA at NYU Stern/ Minor|
|11-20-2013||PBOC says the country does not benefit from foreign currency holdings||Yuan appreciation will benefit Chinese citizens||Bloomberg News/ Major|
|7-22-2013||Removal of lending interest rate floor||To further market-based interest rate reform||PBC Website/ Major|
|6-28-2013||Trust loan information will be included in the financial credit information database||To comply with the requirements of Regulation on the Administration of Credit Information Industry||PBC Website/ Minor|
|6-22-2013||Bilateral local currency swap agreement signed with Bank of England||To facilitate bilateral economic ties and trade and maintain financial stability||PBC Website/ Minor|
|5-15-2013||Requirements for implementation of Measures for the Pilot Program of Securities Investment in China by RQFIIs||To comply with requirements of the policy, Measures for the Pilot Program of Securities Investment in China by RQFIIs||PBC Website/ Minor|
|4-9-2013||Direct trading of Australian dollar launched by the China Foreign Exchange Trade System||To strengthen bilateral economic and trade relations between China and Australia||PBC Website/ Minor|
|3-28-2013||Bilateral currency swap agreement with Bank of Brazil signed||To strengthen economic ties and enhance financial stability||PBC Website/ Minor|
The purpose of the main policy moves that we have seen in the past year can be categorized as either furthering China’s foreign ties within the context of prior policy goals (reflected particularly in some of the minor measures), or as promoting the goals of the current administration. A statement from the Monetary Policy Committee in the Fourth Quarterly Meeting of 2014 on January 9, 2014 sums up some of these latter targets:
“It was emphasized at the meeting that to implement the decisions of the 18th CPC National Congress, the 3rd Plenary Session of the 18th CPC Central Committee and the Central Economic Work Conference, the latest developments in the financial market and real sector at home and abroad and the changes in international capital market will be closely monitored; in accordance with the general requirements of seeking progress while maintaining stability and carrying on reform and innovation, efforts will be made to continue the sound monetary policy, maintain appropriate liquidity, guide money, credit and the all-system financing aggregates to grow at a proper pace, and optimize the financing and credit structure. In the meantime, efforts will be made to integrate reform measures into macroeconomic regulation, and enhance the efficiency of financial sector operation and its ability to serve the real economy. The market-based interest rate reform and the RMB exchange rate regime reform will be furthered to keep the RMB exchange rate basically stable at an adaptive and equilibrium level.”
While the Xi-Li administration made it clear from the outset that they were pursuing financial marketization, it was unknown one year ago exactly how PBOC policy would seek to meet this general target. Now it is somewhat more transparent; the PBOC is carrying out major reforms every four months or thereabouts, with the first major move on July 22, 2013. The reforms truly are moving in the direction of financial liberalization, yet continue to control for risk.
Right now, the opaque is becoming more transparent; the general more specific, and one might assume that this will continue. To predict what major financial reforms may occur going forward, therefore, one must look back to the important meetings referenced in the statement above. The central government has already announced that the deposit rate ceiling will soon be lifted; according to this (very briefly established) pattern, this might take place in July, four months from now. We shall soon find out.
Follow Sara Hsu on Twitter @SaraHsuChina.