Table of contents for The money supply process and monetary policy in China / Yanfen Huang.

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List of Figures                                                                    XI
List of Tables                                                                   XIII
Abbreviations                                                                     XV

1. Introduction                                                                1
 1.1 Background                                                               1
     1.1.1 The increasingly significant role of monetary policy in China's
          macroeconomic management                                             1
     1.1.2 The poor performance of monetary policy                            4
 1.2. Current literature                                                      6
 1.3 The structure of the dissertation                                        7

2 Institutional Conditions of Monetary Policy in China                         9
 2.1 Institutional reform of China's financial sector                         9
     2.1.1 Development of China's financial sector: an overview                9
 China's banking system before the economic reform           10
 The three stages of the financial sector reform in China    11
 The structure of the Chinese banking sector                     16
     2.1.2 The institutional characteristics of the central banking system    19
 The PBC's non-independent and non-autonomous feature        19
 Poor banking supervision                                        21
     2.1.3 The problems of the banking system                                      22
 The dominance of state-ownership and lack of operational
                 independence in the banking sector                               23
 Obligations to the SOEs and moral hazard                        24
 Lack of competition                                             25
 2.2 Development of China's financial markets                                      26
     2.2.1 The development of capital markets                                      27
 The stock markets                                               27
 The bond markets                                                29


     2.2.2 The development of money markets                                     34
 The interbank money market                                    34
 The repurchase market for securities                          38
 The commercial bill market                                    39
 The foreign exchange market                                   41
     2.2.3. The characteristics of China's financial market development     43
 2.3 Summary                                                                    47

3. Study of the Money Supply Process in the Framework of Monetary Base and
  /Money Multiplier                                                             48
 3.1 The monetary base                                                          49
     3.1.1 The PBC's balance sheet and the monetary base                        49
 The PBC's balance sheet                                       49
 The monetary base and its components                          50
     3.1.2 Factors that affect the monetary base                                52
 Claims on banking institutions (CB)                           53
 Net foreign assets (NFA)                                      56
 Net claims on government (NCG)                                58
 Claims on other sectors (CO)                                  58
 3.2 Monetary base and monetary aggregate: The mechanistic multiplier process  60
     3.2.1 The concept of the money multiplier                                  60
     3.2.2 Factors that affect the money multiplier                             61
 Determinants of the ratio of currency to bank deposits (c)  61
 Determinants of the excess reserve ratio (r2)                 65
 Determinants of the ratio of deposits of other sectors to bank
                 deposits (r3)                                                  66
     3.2.3 Empirical analysis of the stability of the money multiplier      68
 The data                                                      69
 Unit root test                                               71
 The long-run stable relation between the monetary base and the two
                 monetary aggregates Ml and M2                                  73

4. Instruments of Monetary Policy in China                                         80
 4.1 The credit plan                                                               80
     4.1.1 The evolution of the credit plan                                        80
     4.1.2 The formulation and implementation of the credit plan                   83
     4.1.3 The ineffectiveness of the credit plan                                  84
 4.2 Indirect monetary policy instruments and their effectiveness             90
     4.2.1 PBC lending to banking institutions                                     91
 The evolution of PBC lending to banking institutions        91
 The ineffectiveness of PBC lending to banking institutions  93
     4.2.2 The rediscount policy                                                   96
     4.2.3 The limited role of reserve requirements                                99
 The characteristics of the required reserve arrangement     99
 The limited role of reserve requirements                       101
     4.2.4 Market-based operations                                                103
 The emergence of market-based operations                       103
 The minor role of market-based operations                      103
 4.3 Interest rate management in China                                            105
     4.3.1 The evolution of the interest rate system                              105
     4.3.2 General principles of the PBC's interest rate policy                   110
 General principles of the PBC's interest rate setting      110
 General principles of the PBC's interest rate adjustment   112
     4.3.3 Problems of the current administered interest rate system         113
 4.4 Concluding remarks                                                           116

5. Explanation of the Money Supply Process Using the Credit Market Theory    117
 5.1 The credit market theory of the money supply                                 118
     5.1.1 The macroeconomic market for credit and money                          118
     5.1.2 The market for central bank money                                      123
     5.1.3 The complete model                                                     124
 5.2 Explanation of the money supply process using credit market theory     127
     5.2.1 The behavioural functions of non-banks                                 128
     5.2.2 The behavioural functions of banks                                     133
     5.2.3 The market for central bank money                                     139


      5.2.4 The complete money supply model                                         141
      5.2.5 Effects of the quasi - endogeneity of money supply on monetary policy  145
  The PBC's passivity to demand and money multiplier shocks   145
  Non-existence of well-functioning monetary transmission
                  mechanisms                                                       148
  5.3 Summary                                                                       151

6. Designing the Strategy and Operating Procedure for Monetary Policy in China  153
  6.1 Intermediate target                                                            154
      6.1.1 Theoretical analysis about various suggested intermediate targets  156
  Monetary aggregates as an intermediate target                   156
  Interest rates as an intermediate target                       159
  Nominal GDP as an intermediate target                           161
  Exchange rate as an intermediate target                         162
  The concept of inflation targeting                              164
      6.1.2 Choosing the intermediate target in the current Chinese transition period  166
  Analysis of inflation targeting in the Chinese transition period  169
  Analysis of monetary targeting in the Chinese transition period  172
  6.2 Operating target                                                              175
  6.3 Concluding remarks                                                            181

7. Conclusion and Policy Issues                                                     182
  7.1 Conclusion: Interest rate liberalisation is an essential prerequisite for the
      successful conduct of monetary policy                                         182
  7.2 The necessary preconditions, obstacles and reform tactics in interest rate
      liberalisation                                                                184
  7.3 Some issues for future monetary policy research                               187

 Appendices                                                                          190
 Appendix I: Law of the People's Bank of China                                     190
 Appendix II: The data                                                             199

References                                                                          201


Library of Congress Subject Headings for this publication: Money supply China, Monetary policy China, China Economic conditions 1976-2000