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Monetary Management in Mainland China in the Face of Large Capital Inflows

Author

Listed:
  • Dong He

    (External Department, Hong Kong Monetary Authority)

  • Carmen Chu

    (External Department, Hong Kong Monetary Authority)

  • Chang Shu

    (External Department, Hong Kong Monetary Authority)

  • Amy Wong

    (External Department, Hong Kong Monetary Authority)

Abstract

Recent surges of capital inflows to mainland China have prompted the People's Bank of China (PBoC) to improve its monetary management techniques. Increasing sophistication in open market operations has allowed the PBoC to sterilise the impact of foreign exchange intervention on domestic liquidity. The PBoC carried out 110 open market operations in 2004, through which 42 percent of the increase in domestic liquidity as a result of foreign exchange purchase was sterilized. By the end of 2004, the outstanding amount of central bank bills amounted to close to RMB1 trillion yuan, equivalent to about 17 percent of reserve money or 7 percent of nominal GDP. Preliminary econometric analysis shows that the reaction by the PBoC has been strong and swift. The central bank has also become more active in sterilisation operations in the last couple of years. Nevertheless, it is difficult to judge the effectiveness of these operations in insulating domestic monetary conditions from surges of capital inflows. Although there appears to be little indication that capital inflows have had a causal effect on domestic credit growth, this observation may simply reflect the possibility that there is no effective transmission mechanism between changes in the PBoC's balance sheet and those of the commercial banks.

Suggested Citation

  • Dong He & Carmen Chu & Chang Shu & Amy Wong, 2005. "Monetary Management in Mainland China in the Face of Large Capital Inflows," Working Papers 0507, Hong Kong Monetary Authority.
    • Handle: RePEc:hkg:wpaper:0507
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    File URL: http://www.info.gov.hk/hkma/eng/research/RM07-2005.pdf
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    Cited by:

    1. Ouyang, Alice Y. & Rajan, Ramkishen S. & Willett, Thomas D., 2010. "China as a reserve sink: The evidence from offset and sterilization coefficients," Journal of International Money and Finance, Elsevier, vol. 29(5), pages 951-972, September.
    2. Wang Yongzhong, 2010. "Model Structure and the Combined Welfare and Trade Effects of China's Trade Related Policies," Trade Working Papers 23038, East Asian Bureau of Economic Research.
    3. Zhang, Chenying, 2010. "Sterilization in China: Effectiveness and Cost," Working Papers 10-29, University of Pennsylvania, Wharton School, Weiss Center.
    4. Aaron Mehrotra, 2012. "On the use of sterilisation bonds in emerging Asia," BIS Papers chapters, in: Bank for International Settlements (ed.), Are central bank balance sheets in Asia too large?, volume 66, pages 111-131, Bank for International Settlements.
    5. Zhuo Tan & Shenggang Yang, 2012. "Neutralization in China: evidence from the balance sheet of the People’s Bank of China," Journal of Economic Policy Reform, Taylor & Francis Journals, vol. 15(1), pages 25-31, March.
    6. repec:zbw:bofitp:2013_001 is not listed on IDEAS
    7. Burdekin, Richard C.K. & Siklos, Pierre L., 2008. "What has driven Chinese monetary policy since 1990? Investigating the People's bank's policy rule," Journal of International Money and Finance, Elsevier, vol. 27(5), pages 847-859, September.
    8. Aaron Mehrotra, 2012. "On the use of sterilisation bonds in emerging Asia," BIS Papers chapters, in: Bank for International Settlements (ed.), Are central bank balance sheets in Asia too large?, volume 66, pages 111-131, Bank for International Settlements.
    9. Abdul Rishad & Sanjeev Gupta & Akhil Sharma, 2022. "An Assessment of The Effectiveness of Sterilization of Central Bank Interventions: Empirical Evidence from India," Prague Economic Papers, Prague University of Economics and Business, vol. 2022(5), pages 417-440.

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