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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
2.1.1.1 China's banking system before the economic reform 10
2.1.1.2 The three stages of the financial sector reform in China 11
2.1.1.3 The structure of the Chinese banking sector 16
2.1.2 The institutional characteristics of the central banking system 19
2.1.2.1 The PBC's non-independent and non-autonomous feature 19
2.1.2.2 Poor banking supervision 21
2.1.3 The problems of the banking system 22
2.1.3.1 The dominance of state-ownership and lack of operational
independence in the banking sector 23
2.1.3.2 Obligations to the SOEs and moral hazard 24
2.1.3.3 Lack of competition 25
2.2 Development of China's financial markets 26
2.2.1 The development of capital markets 27
2.2.1.1 The stock markets 27
2.2.1.2 The bond markets 29
2.2.2 The development of money markets 34
2.2.2.1 The interbank money market 34
2.2.2.2 The repurchase market for securities 38
2.2.2.3 The commercial bill market 39
2.2.2.4 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
3.1.1.1 The PBC's balance sheet 49
3.1.1.2 The monetary base and its components 50
3.1.2 Factors that affect the monetary base 52
3.1.2.1 Claims on banking institutions (CB) 53
3.1.2.2 Net foreign assets (NFA) 56
3.1.2.3 Net claims on government (NCG) 58
3.1.2.4 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
3.2.2.1 Determinants of the ratio of currency to bank deposits (c) 61
3.2.2.2 Determinants of the excess reserve ratio (r2) 65
3.2.2.3 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
3.2.3.1 The data 69
3.2.3.2. Unit root test 71
3.2.3.3 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
4.2.1.1 The evolution of PBC lending to banking institutions 91
4.2.1.2 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
4.2.3.1 The characteristics of the required reserve arrangement 99
4.2.3.2 The limited role of reserve requirements 101
4.2.4 Market-based operations 103
4.2.4.1 The emergence of market-based operations 103
4.2.4.2 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
4.3.2.1 General principles of the PBC's interest rate setting 110
4.3.2.2 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
5.2.5.1 The PBC's passivity to demand and money multiplier shocks 145
5.2.5.2 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
6.1.1.1 Monetary aggregates as an intermediate target 156
6.1.1.2. Interest rates as an intermediate target 159
6.1.1.3 Nominal GDP as an intermediate target 161
6.1.1.4 Exchange rate as an intermediate target 162
6.1.1.5 The concept of inflation targeting 164
6.1.2 Choosing the intermediate target in the current Chinese transition period 166
6.1.2.1 Analysis of inflation targeting in the Chinese transition period 169
6.1.2.2 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