1. China’s Central Bank & Monetary Policy Implications for the Global Economy Presented by Louisa Chu

2. Introduction Why is the Chinese economy important? Why is the Chinese economy important? 2 nd largest economy 2 nd largest economy Rapid economic growth rate Rapid economic growth rate Affects many other national economies Affects many other national economies

3. Overview of Central Bank People’s Bank of China People’s Bank of China Created in 1948 Created in 1948 Responsible for both Central and Commercial banking activities Responsible for both Central and Commercial banking activities 1983 (economic reform) split off commercial banking and was legally proclaimed as the country’s central bank 1983 (economic reform) split off commercial banking and was legally proclaimed as the country’s central bank

4. Important Functions Formulate & implement Monetary Policy Formulate & implement Monetary Policy Issue currency & maintain stable exchange rate Issue currency & maintain stable exchange rate Regulate financial markets Regulate financial markets Manage state treasury Manage state treasury Conduct economic research & analysis Conduct economic research & analysis Protect state foreign exchange & gold reserves Protect state foreign exchange & gold reserves Utilizes various instruments to stabilize the financial system Utilizes various instruments to stabilize the financial system

5. Objective of Monetary Policy “Maintain the stability of the value of the currency and thereby promote economic growth” “Maintain the stability of the value of the currency and thereby promote economic growth” Done through various policy instruments: Done through various policy instruments: Reserve requirement ratio Reserve requirement ratio Base interest rate Base interest rate Rediscounting of loans Rediscounting of loans Rules for central bank lending Rules for central bank lending Open market operations Open market operations

6. Comparison with the Fed Similarities Create monetary policy Create monetary policy Similar MP instruments Similar MP instruments Regulate financial institutions Regulate financial institutions Advisory committee Advisory committee Perform economic research Perform economic research Must report to State Council through Quarterly reports Must report to State Council through Quarterly reports Differences Independence of treasury from bank Is completely state- owned PBC not completely independent from government for important functions China operates bank-based system

7. Interest Rates Bank lending industry is growing rapidly Bank lending industry is growing rapidly Too much credit growth could lead to non-performing loans Too much credit growth could lead to non-performing loans Contradictory to efforts to increase consumption Contradictory to efforts to increase consumption Recently raised lending interest rates Recently raised lending interest rates

8. Interest Rates Implications Implications Increased savings Increased savings Decrease in property development Decrease in property development Decreased investment in financial securities, thus slowing maturity of global financial markets Decreased investment in financial securities, thus slowing maturity of global financial markets Negative effect on investors’ sentiments about future rates Negative effect on investors’ sentiments about future rates Appreciation of currency Appreciation of currency

9. OMO & Reserves Further tighten money supply Further tighten money supply This year, issued over 600billion Yuan in bank bills & repurchase agreements This year, issued over 600billion Yuan in bank bills & repurchase agreements Effective July, reserve ratio raised to 8% Effective July, reserve ratio raised to 8% 150billion Yuan out of circulation 150billion Yuan out of circulation Exchange rate policy contradictory to these market actions Exchange rate policy contradictory to these market actions

10. Exchange Rate “artificial” “artificial” undervalued undervalued Pegged to dollar until recently Pegged to dollar until recently Not controlled by market but through volatility of other currencies Not controlled by market but through volatility of other currencies Import/export prices are not fair Import/export prices are not fair China’s mounting surplus China’s mounting surplus

11. Exchange Rate China’s reasoning: stability China’s reasoning: stability Devaluation since economic reform in the 1980s Devaluation since economic reform in the 1980s Do not care about other countries’ opinions or pressures Do not care about other countries’ opinions or pressures Central bank’s objectives are not in line with the state’s Central bank’s objectives are not in line with the state’s

12. Historical Exchange Rates YearRateYearRate 19702.4619873.72 19712.26719883.72 19732.0419894.72 19741.8419905.22 19751.9719915.263 19761.8819925.42 19771.7319935.75 19781.5819948.446 19791.519958.318 19801.5320008.178 19811.7520018.277 19821.9320028.277 19832.820038.277 19853.220048.276 19863.7220058.199 20068.037 Rate stated in terms of Yuan per US Dollar

13. Historical Exchange Rates

14. Future Predictions Central bank and government relaxing on exchange rate policy Central bank and government relaxing on exchange rate policy “Gradually retreat from active role in onshore currency markets to give market forces more say in setting Yuan’s price” “Gradually retreat from active role in onshore currency markets to give market forces more say in setting Yuan’s price” Economy passing stage of “industrializing” to become industrialized and a world power Economy passing stage of “industrializing” to become industrialized and a world power

15. Future Implications “fairer” world market “fairer” world market True valuation of Yuan True valuation of Yuan Access to China’s markets by outside investors Access to China’s markets by outside investors Economic freedom for businesses and individuals Economic freedom for businesses and individuals Increased consumption & access to foreign goods Increased consumption & access to foreign goods

16. Any Questions? Thank you