Monetary Policy in China: 1994-2008
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Monetary Policy in China: Institutions, Targets, Instruments and Strategies INAUGURAL-DISSERTATION zur Erlangung des akademischen Grades eines Doktors der Wirtschaftswissenschaften an der Wirtschaftswissenschaftlichen Fakultät der Bayerischen Julius-Maximilians-Universität Würzburg vorgelegt von Diplom-Volkswirt Michael Geiger aus Würzburg (derzeit in Washington, DC, USA) Würzburg 2010 Erstgutachter: Prof. Dr. Peter Bofinger ii | P a g e Acknowledgement This thesis has benefitted from the support of many people in various parts of the world to whom I am deeply grateful. The work was researched and written in four different locations: Würzburg (Germany), Beijing (China), Geneva (Switzerland) and Washington D.C (USA). First of all I would like to thank my honored doctoral thesis supervisor, Prof. Dr. Peter Bofinger. His support, intellectual leadership and generous granting of scientific freedom dur- ing all phases of this study were the guarantee for finishing my work. His support endured even though our time together was extremely limited. I thank Prof. Dr. Björn Alpermann for the preparation of the second opinion. It was the Chi- nese language course at the beginning of my studies, conducted by his Department of Chi- nese Studies, which in 1997 sparked my initial interest into China. I am also indebted to Prof. Dr. Heiner Flassbeck, my supervisor and mentor at the United Nations Conference on Trade and Development (UNCTAD). He helped me greatly in apply- ing my research into first hand policy advice and it is to his support that parts of this study were earlier published in UNCTAD papers and studies. My two-year stay in China was made possible through the generous support of the German Academic Exchange Service (DAAD). Once in Beijing, I was fortunate enough that the Deutsche Bundesbank and the People‘s Bank of China linked-up and allowed me to join the Graduate School of the People‘s Bank of China (GSPBC). At the GSPBC, I am thankful to Kang Yitong, Yin Xiaobing and Chao Chen for all the help and discussions during my stay. My special thanks go to Dr. Nicolas Schlotthauer, who has provided me with invaluable sup- port and insights throughout the process. I am also thanking Zhang Bin for his comments and suggestions on my research. I remain solely responsible for the analyses, interpretations, and conclusions expressed in this thesis. They do not necessarily represent the views of any of the institutions I currently am or I was associated with in the past. I would like to thank my parents, who supported my education and this particular endeavour from the beginning. Having their encouragement and support helped me greatly through the time. My mother is an incredible source of energy. My father bore the difficult task of reading through various versions of the manuscript to correct any shortcomings in the language. I am thanking my two brothers, Matthias and Markus. The many discussions during our studies in Würzburg triggered the motivation to start the work on this thesis. I am thanking my lovely wife Xin. We would have never met had I not focused on the subject that eventually took me to Geneva. Thank you, Xin, for your caring support. This thesis is dedicated to you. December 2010 Michael Geiger Washington, DC (USA) iii | P a g e Abstract China’s monetary policy aims to reach two final targets: a paramount economical target (i.e. price sta- bility) and a less important political target (i.e. economic growth). The main actor of monetary policy is the central bank, the People’s Bank of China (PBC). But the PBC is a non-independent central bank. The State Council approves the goals of monetary policy. Very limited instrument independence means that interest rates cannot be set at the PBC’s discretion and in-sufficient personal independ- ence fails to insulate central bank officials from political influence. Monetary policy in China applies to two sets of monetary policy instruments: (i) instruments of the PBC; and (ii) non-central bank policy instruments. The instruments of the PBC include price-based indirect and quantity-based direct in- struments. Non-central bank policy instruments include price and wage controls. The simultaneous usage of all these instruments leads to various distortions that ultimately prevent the interest rate channel of monetary transmission from functioning. Moreover, the strong influences of quantity-based direct instruments and non-central bank policy instruments bring into question the approach of indirect monetary policy in general. In German Chinas Geldpolitik verfolgt zwei Endziele: Ein alles überragendes wirtschaftliches Ziel (d.h. Preisstabilität) und ein weniger wichtiges politisches Ziel (d.h. Wirtschaftswachstum). Der Hauptakteur der Geldpolitik ist die Zentralbank, die People's Bank of China (PBC). Aber die PBC ist eine nicht- unabhängige Zentralbank. Der Staatsrat genehmigt die Ziele der Geldpolitik, und eine sehr begrenzte Instrumenten-Unabhängigkeit bedeutet, dass die Zinsen nicht vollständig nach dem Ermessen der PBC festgelegt werden können. Die ungenügende personelle Unabhängigkeit der Zentralbank schafft es nicht, die Amtsträger dem politischen Einfluss zu entziehen. Der Geldpolitik in China stehen zwei Arten von geldpolitischen Instrumenten zur Verfügung: (i) Instrumente der PBC; und (ii) Politische nicht-Notenbank Instrumente. Die Instrumente der PBC beinhalten preis-basierte indirekte und quantität-basierte direkte Instrumente. Zu den politischen nicht-Notenbank Instrumenten zählen Preis- und Lohnkontrollen. Die gleichzeitige Nutzung dieser Instrumente führt zu vielerei Verzerrungen, die letztlich verhindern, dass der Zinskanal des monetären Transmissionsmechanismus funktionieren kann. Darüber hinaus stellen die starken Einflüsse der quantität-basierten direkten Instrumente und der politischen nicht-Notenbank Instrumente den Ansatz der indirekten Geldpolitik im Allgemeinen in Frage. In Chinese 中国货币政策的最终目的是达到二个目标：一个首要的经济目标（即物价稳定）和一个次要的政治目标 （即经济增长）。货币政策的主要角色是中央银行，既中国人民银行。但中国人民银行是一个非独立的 央行。国务院批准货币政策的目标，非常有限的货币政策工具的独立意味着利率不能由中国人民银行自 主决定和缺乏个体独立不能使央行官员免受政治的影响。中国的货币政策适用于两套货币政策方针：（ 一）中国人民银行工具，及（二）非中央银行政策工具。中国人民银行工具包括物价为基础的间接手段 和数量为基础的直接手段。非央行政策工具包括物价和工资调控。所有这些工具的并存使用导致了多种 歪曲而最终阻碍了货币政策传导的利率渠道的职能。此外, 数量为基础的直接手段和非央行政策工具的 强烈影响，将间接货币政策的总体方针引入了疑问。 iv | P a g e Table of Contents 1 PREFACE ........................................................................................................................................ 1 2 THE CHINESE FINANCIAL SECTOR ............................................................................................ 4 2.1 The People’s Bank of China (PBC) ....................................................................................... 16 2.1.1 Cornerstones in the establishment of the PBC as the central bank of China .............. 16 2.1.2 The operational set-up of the PBC .............................................................................. 17 2.1.3 Structure of the central bank system in China ............................................................. 23 2.2 Financial regulation and supervision ..................................................................................... 27 2.2.1 China Securities Regulatory Commission (CSRC) ...................................................... 29 2.2.2 China Insurance Regulatory Commission (CIRC) ....................................................... 30 2.2.3 China Banking Regulatory Commission (CBRC)......................................................... 31 2.3 Financial institutions .............................................................................................................. 33 2.3.1 Banking corporations ................................................................................................... 34 2.3.2 Non-bank financial institutions ..................................................................................... 39 2.3.3 Limited competition in the Chinese financial sector ..................................................... 42 2.4 Institutional arrangements in China: The PBC's position ...................................................... 48 3 CENTRAL BANK INDEPENDENCE ............................................................................................ 51 3.1 Goal independence ............................................................................................................... 53 3.2 Instrument independence ...................................................................................................... 53 3.3 Personal independence ......................................................................................................... 54 4 TARGETS OF MONETARY POLICY IN CHINA .......................................................................... 58 4.1 Operating targets ................................................................................................................... 58 4.2 Intermediate targets ............................................................................................................... 59 4.3 Final targets ........................................................................................................................... 67 4.4 Other targets and responsibilities .......................................................................................... 68 5 INSTRUMENTS OF MONETARY POLICY IN CHINA ................................................................. 70 5.1 Instruments of the People’s Bank of China as the central bank of China ............................. 71 5.1.1 Price-based