China's Monetary Policy & IMF

Topics: Macroeconomics, Central bank, Monetary policy Pages: 8 (1874 words) Published: October 8, 2014
Chenxin Pan
Class Time: 2:00
Briefing paper #2
Related Chapter: 11
China’s Monetary Policy and IMF
I. Intro
A. IMF and China
B. In this paper, I will discuss…
II. Body
A. China’s monetary system
Open Market Operation
B. 1994 “Monetary” Crisis in China
Background and causes
Phenomenon and effects
IMF’s response and action
C. 1997 East Asian Crisis
Summary of what happened
China’s action
Build up official reserves
Don’t have to borrow from IMF
Keep exchange rate competitive
D. China’s contemporary monetary policy and regulation
Monetary Policy Committee
Policies (interest rate, RRR, foreign reserves...)
IMF’s involvement
Recent monetary reform
III. Conclusion
A. Future of China’s economy
International Monetary Fund is an organization that consists of 188 countries, in which countries work together to promote global monetary cooperation, secure financial stability, and sustainable economic growth around the globe. IMF serves as an international bank, loaning money to member countries due to economic difficulties; and as an adjudicator, reconciling economic conflicts between countries. It’s a pool of central bank reserves and national currencies that allows member countries to borrow. China joined IMF in 1945, and has twice used IMF credits, in 1981 and in 1986.  China holds annual consultations with IMF on economic development and policy issues. In recent number of years, China has been accused of currency manipulation and excessive foreign reserves to underpin economic growth. It has been an issue of concern of IMF, and it has warned China and forced China to make policy reforms. In this paper, I will begin with China’s monetary system, 1994 monetary crisis, and then discuss China’s current monetary policies, reforms, and IMF’s regulation on China. China regulates its monetary system through PBOC (People’s Bank of China) by adjusting interest rate, performing open market operation, and manipulating Reserve Requirement Ratio. How Chinese government uses these policy tools is interdependent of how Chinese currency Yuan’s is arranged in foreign exchange mechanism. Central banks depreciate currency by cutting interest rate and increasing in foreign reserve to stimulate economic growth. In other words, Chinese regulators used more non-market financial policy to administrate credit expansion. Through effective tight state control policies, China had passed a long way from where it was to the second largest economy in the world. It went through 1994 Monetary Crisis, 1997 East Asian Crisis, and Global Financial Crisis in 2008. These crises not only gave lessons to the Chinese regulating body and IMF, but also indicate a warning sign of the underlying risk of using too much state control on interest rate and exchange rate. 1994 was a significant year in China’s economic history. China faced an unprecedented annual inflation rate of 24% in 1994. It was largely caused by the over investment in early 1990 as government loosen credit to enterprises. Especially after DengXiaoPing’s visit to Southern China in 1992, in which he strongly advocated for economic growth, investment increased “43% from previous year”(3). The overinvestment not only doubled the price of construction materials such as steel and lumber, but also increased price of grains significantly. The sudden rapid rise in price had a devastated effect on resident’s living conditions. To fight with the inflation, the Chinese government implemented a series of actions, which include “tightening credit/loans, strict regulation of local/regional capital fund raising, tightening fixed asset investment scale, re-examining various newly established financial institutions, and controlling capital and cash holding of all financial organizations”(3). The main goal of these policies is to lower the economic growth rate and decrease the overall fixed asset investment. After one year of adjusting and implementing policies, the...

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