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China’s evolving reserve requirements

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Author Info

  • Guonan Ma
  • Yan Xiandong
  • Liu Xi

Abstract

We examine the role of reserve requirements as a cheaper substitute for the open market operations of the People’s Bank of China (PBC) to sterilise foreign exchange interventions in recent years. China’s reserve requirements have also been used to address a range of other policy objectives, not least macroeconomic management, financial stability and credit policy. The preference for reserve requirements reflects the size of sterilisation and the associated costs, in a quantity-oriented monetary policy framework faced with policy dilemmas. The PBC often finds it easier to make reserve requirement adjustments than interest rate decisions and enjoys greater discretion in applying this tool. The monetary effects of reserve requirements need to be explored not in isolation but in conjunction with other policy actions. Depending on the policy mix, higher reserve requirements tend to signal a tightening bias, to squeeze excess reserves of banks, to push market interest rates higher and to help widen net interest spreads, thus tightening domestic monetary conditions. Reserve requirements, however, impose an implicit tax burden on Chinese banks, albeit the latter seem to pass through a large but incomplete portion of these costs to their customers.

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File URL: http://hdl.handle.net/10.1080/14765284.2013.789682
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Bibliographic Info

Article provided by Taylor & Francis Journals in its journal Journal of Chinese Economic and Business Studies.

Volume (Year): 11 (2013)
Issue (Month): 2 (May)
Pages: 117-137

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Handle: RePEc:taf:jocebs:v:11:y:2013:i:2:p:117-137

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  1. Carlos Montoro & Ramon Moreno, 2011. "The use of reserve requirements as a policy instrument in Latin America," BIS Quarterly Review, Bank for International Settlements, March.
  2. Guonan Ma & RobertN McCauley, 2008. "Efficacy Of China'S Capital Controls: Evidence From Price And Flow Data," Pacific Economic Review, Wiley Blackwell, vol. 13(1), pages 104-123, 02.
  3. Paul Conway & Richard Herd & Thomas Chalaux, 2010. "Reforming China's Monetary Policy Framework to Meet Domestic Objectives," OECD Economics Department Working Papers 822, OECD Publishing.
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Cited by:
  1. Hailong Jin & E. Kwan Choi, 2013. "China's Profits and Losses from Currency Intervention, 1994-2011," CESifo Working Paper Series 4551, CESifo Group Munich.
  2. Glick, Reuven & Hutchison, Michael, 2013. "China's financial linkages with Asia and the global financial crisis," Journal of International Money and Finance, Elsevier, vol. 39(C), pages 186-206.
  3. Patrick Blagrave & Peter Elliott & Roberto Garcia-Saltos & Douglas Hostland & Douglas Laxton & Fan Zhang, 2013. "Adding China to the Global Projection Model," IMF Working Papers 13/256, International Monetary Fund.
  4. Luke Deer & Ligang Song, 2012. "China's Approach to Rebalancing: A Conceptual and Policy Framework," China & World Economy, Institute of World Economics and Politics, Chinese Academy of Social Sciences, vol. 20(1), pages 1-26, 01.
  5. Andrew Filardo & James Yetman, 2012. "Key facts on central bank balance sheets in Asia and the Pacific," BIS Papers chapters, in: Bank for International Settlements (ed.), Are central bank balance sheets in Asia too large?, volume 66, pages 10-29 Bank for International Settlements.
  6. Dena Sedeghian & Graham White & Patrick D’Arcy, 2013. "Macroeconomic Management in China," RBA Bulletin, Reserve Bank of Australia, pages 11-20, June.

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