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


  • 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)


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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    Cited by:

    1. 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.
    2. 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.

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