China’s Monetary Policy: Institutional Setting, Tools and Challenges

Understanding the monetary policy of China, the world’s second largest economy, is more crucial today than ever, and yet it is not widely researched or well-understood outside of China. This chapter tries to narrow this gap by shedding light on the institutional setting of China’s monetary policy, and by assessing its main tools and current challenges. It finds that, despite the progress and sophistication of Chinese monetary policy in recent years, for example, by moving from quantity-based to more price-based tools, its implementation suffers from shortcomings in communication and a lack of independence from political interference. Ultimately, it seems to be the Chinese Communist PartyChinese Communist Party (CCP) (CCP) that determines the “room for manoeuvre” that the People’s Bank of ChinaPeople’s Bank of China (PBC) (PBC) has in order to maintain monetary and financial stabilityFinancial stability/instability in the rapidly changing domestic and global environment. As a result, even in terms of communication, the PBC seems to deviate from today’s central bank norm of taking transparencyTransparency for granted for effectively managing inflation expectationsInflation expectation.