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Reforming China's Monetary Policy Framework to Meet Domestic Objectives


  • Paul Conway
  • Richard Herd


  • Thomas Chalaux



As a result of reforms and financial sector development, the People’s Bank of China (PBoC) now exerts significant control over money market interest rates. With money market conditions increasingly influencing effective commercial lending rates, the PBoC is also able to affect the cost of credit without recourse to its benchmark commercial bank rates. Furthermore, interest rates are an important determinant of investment spending in China, via the user cost of capital, and aggregate economic activity influences inflation. Hence, greater use of interest rates in implementing monetary policy would enhance macroeconomic stabilisation while avoiding a number of drawbacks of the current quantity-based approach. In addition, increased flexibility in the exchange rate would enhance its role in offsetting macroeconomic shocks and allow the PBoC more scope to tailor monetary policy to domestic macroeconomic conditions. Concurrently, changes in the PBoC’s policy stance should be predicated on informed judgments based on the monitoring of a set of indicators in conjunction with a flexible inflation objective as the nominal anchor. This paper relates to the 2010 OECD Economic Review of China ( Poursuivre la réforme de la politique monétaire pour accomplir les objectifs domestiques Suite à diverses réformes et au développement du secteur financier, la Banque Populaire de Chine (BPdC) contrôle désormais de façon significative les taux d’intérêt du marché monétaire. Les conditions du marché monétaire influençant de plus en plus les taux effectifs des prêts commerciaux, la BPdC est également en mesure d’influencer le coût du crédit sans recourir à ses taux d’intérêt commerciaux de référence. De plus, les taux d’intérêt sont un déterminant important de l’investissement en Chine, via le coût du capital, et l’activité exerce une influence sur l’inflation. Par conséquent, une utilisation plus active des taux d’intérêt dans la conduite de la politique monétaire contribuerait à la stabilisation macroéconomique tout en évitant certains des inconvénients de l’approche actuelle par les quantités. En outre, une plus grande flexibilité du taux de change renforcerait son rôle dans l’amortissement des chocs macroéconomiques et donnerait une plus grande latitude à la BPdC pour ajuster la politique monétaire en fonction des conditions macroéconomiques internes. Dans le même temps, les changements de politique monétaire devraient résulter d’une évaluation empirique basée sur le suivi d’une série d’indicateurs dans le cadre d’un ancrage nominal sous la forme d’un objectif d’inflation flexible. Ce document se rapporte à l’Étude économique de la Chine de l’OCDE, 2009, (

Suggested Citation

  • 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.
  • Handle: RePEc:oec:ecoaaa:822-en
    DOI: 10.1787/5km32vmsq6f2-en

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    Cited by:

    1. Deng, Kaihua & Todd, Walker, 2016. "Is the US quantitative easing more effective than China's? A second thought," China Economic Review, Elsevier, vol. 38(C), pages 11-23.
    2. Naoyuki Yoshino & Stefan Angrick, "undated". "Quantities and Prices in China’s Monetary Policy Transmission From Window Guidance to Interbank Rates," GRU Working Paper Series GRU_2016_024, City University of Hong Kong, Department of Economics and Finance, Global Research Unit.
    3. Yang, Jun & Shao, Hanhua, 2016. "Impact of bank competition on the bank lending channel of monetary transmission: Evidence from China," International Review of Economics & Finance, Elsevier, vol. 43(C), pages 468-481.
    4. Nguyen, Vu Hong Thai & Boateng, Agyenim, 2015. "Bank excess reserves in emerging economies: A critical review and research agenda," International Review of Financial Analysis, Elsevier, vol. 39(C), pages 158-166.
    5. Changjun Zheng & Shumaila Meer Perhiar & Naeem Gul Gilal & Faheem Gul Gilal, 2019. "Loan Loss Provision and Risk-Taking Behavior of Commercial Banks in Pakistan: A Dynamic GMM Approach," Sustainability, MDPI, Open Access Journal, vol. 11(19), pages 1-17, September.
    6. Funke, Michael & Paetz, Michael, 2012. "Financial system reforms and China's monetary policy framework : A DSGE-based assessment of initiatives and proposals," BOFIT Discussion Papers 30/2012, Bank of Finland, Institute for Economies in Transition.
    7. Guonan Ma & Yan Xiandong & Liu Xi, 2013. "China’s evolving reserve requirements," Journal of Chinese Economic and Business Studies, Taylor & Francis Journals, vol. 11(2), pages 117-137, May.

    More about this item


    China; Chine; macroeconomic policies; money; Monnaie; politique macro-économique; regulation; réglementation;

    JEL classification:

    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
    • K2 - Law and Economics - - Regulation and Business Law
    • L5 - Industrial Organization - - Regulation and Industrial Policy

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