Chinese Monetary Policy – From Theory to Practice

Published with modifications as: Körner, Finn Marten and Ehnts, Dirk H. (2016), "Chinese monetary policy – from theory to practice", In: Halberstadt, J., Jakob, C., Schuricht, M. "Jenseits des Elfenbeinturms", Josef Eul Verlag GmbH, Lohmar, ch. 7, pages 137-160

22 Pages Posted: 8 Feb 2013 Last revised: 27 Dec 2016

See all articles by Finn Marten Körner

Finn Marten Körner

ZenTra - Center for Transnational Studies; Uniper SE

Dirk H. Ehnts

TU Chemnitz

Date Written: February 7, 2013

Abstract

Chinese monetary policy constitutes a marked example of a clash between theory and practice. In theory, a fixed exchange rate regime with capital mobility turns the money supply into an endogenous variable while expansionary pressure can be alleviated by the central bank by foreign currency transactions. For China, this standard view is contended by the 'compensation thesis' as proposed by Lavoie and Wang (2012) according to which the central bank maintains discretion over money supply by using alternative balance sheet instruments. In this paper we show that the People's Bank of China's (PBoC) activities can be better characterized by the 'compensation thesis' view of alternative money supply operations. In addition, we can thus characterize the PBoC's policy stance as being directed at targeting inflation and exchange rate stability via a five-phase policy mix using sterilization bonds and reserve requirements according to macroeconomic conditions. After downgrading the loans-to-deposits ratio of 75% to the status of an indicator and given the rise in lending despite a high reserve ratio, the quantity-driven approach to monetary policy of the PBoC faces an uncertain future.

Keywords: Chineses monetary policy, nominal exchange rate, money supply, Mundell-Fleming, compensation thesis, Modern Money Theory, sterilization, loans-to-deposit ratio, reserve requirement ratio, credit and money suppply growth

JEL Classification: E31, E5, E58, F31, G21

Suggested Citation

Körner, Finn Marten and Ehnts, Dirk H., Chinese Monetary Policy – From Theory to Practice (February 7, 2013). Published with modifications as: Körner, Finn Marten and Ehnts, Dirk H. (2016), "Chinese monetary policy – from theory to practice", In: Halberstadt, J., Jakob, C., Schuricht, M. "Jenseits des Elfenbeinturms", Josef Eul Verlag GmbH, Lohmar, ch. 7, pages 137-160. Available at SSRN: https://ssrn.com/abstract=2213385 or http://dx.doi.org/10.2139/ssrn.2213385

Finn Marten Körner (Contact Author)

ZenTra - Center for Transnational Studies ( email )

Carl von Ossietzky University of Oldenburg
Ammerländer Heerstraße 138
Oldenburg, 26129
Germany

HOME PAGE: http://www.zen-tra.de

Uniper SE ( email )

E.ON-Platz 1
Düsseldorf, 40479
Germany

HOME PAGE: http://https://www.uniper.energy/

Dirk H. Ehnts

TU Chemnitz ( email )

Chemnitz
Germany

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