2015/7/8 Fudan International Media news Summer session 2015 .http://www.china.org.cn/business/2015- Chinese financial markets 06/28/content 35926375htm tp:www.chinadailvasia.com/business/2013- Part 1: Central Bank and pboc http://www.chinatopix.com/articles/53876/20150616/ .http:/money.cnn.com/2015/06/04/newsleconomvfim July 6 .July 31 udan University, Shanghai, China .http://www.bbc.com/news/business-27717594 Monetary Authority Monetary Policy Monetary authority"is a generic term in finance The actions of a central bank, currency board or nd economics for the entity which controls the other regulatory committee that determine the size money supply of a given currency, and has the right and rate of growth of the money supply, which in set interest rates, and other parameters which turn affects interest rates and economic activities control the cost and availability of money. uthority is a central bank Monetary easing means reducing the cost of money the Federal Reserve: Peoples Bank of China; Bank of or increasing the supply of money to stimulate the conomy when it's in recession; Other arrangements: ECB; HK Monetary Authority monetary tightening means the contrary conductions when the economy is overheating. issue notes or coin Instruments of Monetary Policy Reserve Requirements In general, central banks adjusts the money upply by increasing or decreasing the amount of money that commercial banks can lend to The amount of money that banks are required to he business sector keep on deposit at the central bank for the liquidity purpose Reserve Requirements Usually measured in the percentage of a banks Open Market Operatio total deposit i e, deposit reserve ratio Open Market Repurchase Agreements ising or cutting) RRR means the total money that be lent(from the commercial banks) to the
2015/7/8 1 Fudan International Summer Session 2015 Chinese Financial Markets Part 1: Central Bank and PBoC By Zhang Xiaorong July 6th - July 31st Fudan University, Shanghai, China 1-1 Media News • http://www.china.org.cn/business/2015- 06/28/content_35926375.htm • http://www.chinadailyasia.com/business/2013- 07/31/content_15080789.html • http://www.chinatopix.com/articles/53876/20150616/ chinese-authorities-change-7-members-central-banksmonetary-policy-committee.htm • http://money.cnn.com/2015/06/04/news/economy/im f-federal-reserve-rate-hike-2016/index.html • http://www.bbc.com/news/business-27717594 Monetary Authority • “Monetary authority” is a generic term in finance and economics for the entity which controls the money supply of a given currency, and has the right to set interest rates, and other parameters which control the cost and availability of money. • Generally, a monetary authority is a central bank: the Federal Reserve; People’s Bank of China; Bank of Japan • Other arrangements: ECB; HK Monetary Authority; Free banking where a broad range of entities can issue notes or coin. 1-3 Monetary Policy • The actions of a central bank, currency board or other regulatory committee that determine the size and rate of growth of the money supply, which in turn affects interest rates and economic activities. • Monetary easing means reducing the cost of money or increasing the supply of money to stimulate the economy when it’s in recession; • monetary tightening means the contrary conductions when the economy is overheating. 1-4 Instruments of Monetary Policy • In general, central banks adjusts the money supply by increasing or decreasing the amount of money that commercial banks can lend to the business sector. • Reserve Requirements • Open Market Operations • Open Market Repurchase Agreements • Discount Rate 1-5 Reserve Requirements • Required reserve – The amount of money that banks are required to keep on deposit at the central bank for the liquidity purpose – Usually measured in the percentage of a bank’s total deposit, i.e., deposit reserve ratio – Raising (or cutting) RRR means the total money that be lent (from the commercial banks) to the business sector is reduced (or enlarged). 1-6
2015/7/8 Reserve Requirements Open Market Operations Excess reserve The buying and selling of government securities The amount of cash in hand or deposit in the in the open market in order to expand or contract central bank that is in excess to the required he amount of money in the banking system. eserve The central bank reduces money supply by selling Deposit reserve rate bonds ry dealers(security firms and banks)and decreasing the balance The interest rate that the central bank pays on the that banks can lend equired reserve and the excess reserve Purchase of government securities injects money Open Market Operations Open Market Repurchase Agreements Repurchase Agreement( Repo Reverse Repurchase Agreement An agreement with a commitment by the seller The central bank sells securities to dealers and (dealer) of security to buy it back from the agrees to repurchase them at a higher price purchaser at a specified higher price at a designated future date It contracts the short-term liquidity in the banking ector before the central bank buys back the here the security serves the collateral In the repurchase transaction the central bank What is the difference between Repo and provides short-term liquidity to the banking open market operation? The wording in China is different. Discount Rate Discount Rate The US Fed Discount rate Proceeds from discount loans are also the interest rate charged to co reserves and increase the bank's capacity other depository institutions o from their regional Federal Reserve Bank's lending facility-the discount window, i.e An increase in the discount rate discourages capital financed by the central bank banks from borrowing from the Fed, thereby the total amounts of loans provided to firm extension and seasonal credit extension to a decrease in the discount rate encourages banks to borrow from the fed
2015/7/8 2 Reserve Requirements • Excess reserve – The amount of cash in hand or deposit in the central bank that is in excess to the required reserve • Deposit reserve rate – The interest rate that the central bank pays on the required reserve and the excess reserve 1-7 Open Market Operations • The buying and selling of government securities in the open market in order to expand or contract the amount of money in the banking system. • The central bank reduces money supply by selling bonds to primary dealers (security firms and commercial banks) and decreasing the balance that banks can lend. • Purchase of government securities injects money into the banking system and stimulates growth. 1-8 Open Market Operations • Repurchase Agreement (Repo) – An agreement with a commitment by the seller (dealer) of security to buy it back from the purchaser at a specified higher price at a designated future date. – It represents a collateralized short-term loan where the security serves the collateral. – In the repurchase transaction, the central bank provides short-term liquidity to the banking sector. 1-9 Open Market Repurchase Agreements • Reverse Repurchase Agreement – The central bank sells securities to dealers and agrees to repurchase them at a higher price – It contracts the short-term liquidity in the banking sector before the central bank buys back the security. • What is the difference between Repo and open market operation? • The wording in China is different. 1-10 Discount Rate • The US Fed Discount rate – the interest rate charged to commercial banks and other depository institutions on loans they receive from their regional Federal Reserve Bank's lending facility--the discount window, i.e., the cost of capital financed by the central bank. – Discount windows provides very short-term (overnight) loan extension, short-term loan extension and seasonal credit extension to commercial banks. 1-11 Discount Rate • Proceeds from discount loans are also reserves and increase the bank’s capacity in making loans. • An increase in the discount rate discourages banks from borrowing from the Fed, thereby the total amounts of loans provided to firms. • A decrease in the discount rate encourages banks to borrow from the Fed. 1-12
2015/7/8 Monetary Policy Monetary Aggregates Monetary policy aims to controlling the total money in the economy. Required Reserve Ratio e more investment activities in the real economy, and Reverse R the higher the growth, and the pressure for How do we calculate the total amount of Monetary Aggregates Monetary Aggregates Monetary Base ·Mo base money, high-powered money includes cash or assets that could quickly be converted into currency Defined as the total currency circulating in the public and the total reserve of the M1(narrow money supply) The sum of currency held by the public and banking system The central bank uses monetary policy to djust the amount of reserve of commercial and loan associations, savings banks, and credit union banks, i.e. the money supply Monetary Aggregates The Us M1 and M2 U. s Moncy Supply (IAl and M) M2 M2 comprises M1, savings(including money market deposit accounts), small-denomination time deposits(time deposits, including retail repurchase agreements, in amounts of less than 100 000 dollars), and balances in retail money arket mutual funds Economists usually use"broad money to describe the monetary aggregate M2 is the commonly used measure of broad money
2015/7/8 3 Monetary Policy Easing Tightening Required Reserve Ratio ß Ý Open Market Operation Repo Reverse Repo Discount Rate ß Ý 1-13 Monetary Aggregates • Monetary policy aims to controlling the total money in the economy. • Intuitively, the more money issued, the more investment activities in the real economy, and the higher the growth, and the pressure for inflation. • How do we calculate the total amount of money in the economy? 1-14 Monetary Aggregates • Monetary Base – base money, high-powered money –Defined as the total currency circulating in the public and the total reserve of the banking system – The central bank uses monetary policy to adjust the amount of reserve of commercial banks, i.e., the money supply 1-15 Monetary Aggregates • M0 – includes cash or assets that could quickly be converted into currency • M1 (narrow money supply) – The sum of currency held by the public and transaction deposits (demand deposits) at depository institutions (commercial banks, savings and loan associations, savings banks, and credit unions) 1-16 Monetary Aggregates • M2 – M2 comprises M1, savings (including money market deposit accounts), small-denomination time deposits (time deposits, including retail repurchase agreements, in amounts of less than 100 000 dollars), and balances in retail money market mutual funds. • Economists usually use “broad money” to describe the monetary aggregate • M2 is the commonly used measure of broad money. 1-17 The US M1 and M2 1-18
2015/7/8 Annual Growth of us China Monetary Aggregates(M2) Monetary Aggregates and GDP (in trillion RMB) 甲中∮中少少心 China M2/GDP Broad Money as of GDP 2478 25121409 1996199820002002200420062008201020122014 Source: World Bank History of PBoc History of PBoC 1948-1952: establishment of pboc and the national 1948-1952: establishment of pboc and the national People's Bank of China was established in Declst, PBoC moved to Beiping(now Beijing )in Feb 1949 1948 in Shijiazhuang based on an consolidation of the huabei Bank, the beihai Bank and the xibei supervised by the State Council mer Bank in northern China Peoples Republic of China was established in Oct1, First set of rmb was issued and became the fiat money in northern China PBoC's major functions included money supply, financial markets and supporting economy reconstruction after civil war
2015/7/8 4 Annual Growth of US Monetary Aggregates 1-19 China Monetary Aggregates (M2) and GDP (in trillion RMB) 1-20 0 20 40 60 80 100 120 140 China GDP China M2 21 China M2/GDP 0.82 0.89 0.94 0.99 0.97 1.00 1.07 1.15 1.24 1.34 1.36 1.44 1.54 1.63 1.59 1.62 1.60 1.52 1.51 1.78 1.81 1.80 1.88 1.95 1.93 0.80 1.00 1.20 1.40 1.60 1.80 2.00 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 Broad Money as % of GDP China USA Japan UK Korea 2005 152.2 71.9 206.6 122.5 111.1 2006 158.8 74.1 204 132.1 119 2007 150.5 79.2 202.8 145 122.1 2008 150 84.3 209.1 166.6 129.1 2009 176.6 90.4 227 170.6 136 2010 177.5 84.7 226.1 168.7 131.2 2011 175.9 87.2 238 155.3 131.4 2012 182.4 87.8 241.3 153 133.3 2013 188.2 88.4 247.8 150.9 134.4 2014 193 89.5 251.2 140.9 139.9 Source: World Bank History of PBoC • 1948-1952: establishment of PBoC and the national banking system – People’s Bank of China was established in Dec.1st, 1948 in Shijiazhuang based on an consolidation of the Huabei Bank, the Beihai Bank and the Xibei Farmer Bank in northern China – First set of RMB was issued and became the fiat money in northern China – In southern part of China, Chiang Kai-shek's national currency was still circulating freely. 1-23 History of PBoC • 1948-1952: establishment of PBoC and the national banking system – PBoC moved to Beiping (now Beijing) in Feb.1949 – From Sept. 1949, PBoC became directly supervised by the State Council – People’s Republic of China was established in Oct1, 1949 – PBoC’s major functions included money supply, treasury management, stabilizing national financial markets and supporting economy reconstruction after civil war 1-24
2015/7/8 History of PBoc History of PBoc 1948-1952: the establishment of PBoc and the 1953-1978: national bank in the planned economy private banking industry almost disappeared Most private banks went bankruptcy due to the PBoC served the national institution that governed financial regulations by PBoC the whole financial sector and took the banking PBoC helped transforming private-owned banks to business oint-owned ones PBoC controlled both the sourcing and reign banks' business was halted; foreign lanned economy ohibited circulating in China Others were transformed to joint-owned(private adjusting the money circulation by providing all and government) banks sources of credits to state-owned firms, joint- History of PBoc History of PBoc 1979-1992: transition from a national bank to the 1979-1992: transition from a national bank to the central bank In 1978, China began to adopt the reform and PBoc took the status of central bank from Jan 1st, Focused on setting and implementing monetary banks, trusts, insurance companies)came forth, a policy, controlling the total amount of credit and central bank was necessary for the regulation In Sept. 1983, State Council decided to have the ending and depository business was transferred PBoC function as a central bank with the o Industrial and Commercial Bank of china separation of ICBC The required reserve and rediscount rate system lending to specialized banks)was set up History of PBoc History of PBoC 1993-present: reinforce and complete the role of central bank Commercial I and policy banking gradually CSRC and CIRC established in 1992 and 1998 striped since 1993 ecurity and insurance regulatory function of The Law of the People's Republic of China on the PBoC striped People's Bank of China passed by the third The draft amendment of Law on the people's Bank Plenum of the eighth National People s Congress of China passed on Dec 22, 2003 on March 18, 1995, legally confirmed the PBoc's CBRC established in 2004 to supervise the
2015/7/8 5 1-25 History of PBoC • 1948-1952: the establishment of PBoC and the national banking system – Most private banks went bankruptcy due to the financial regulations by PBoC – PBoC helped transforming private-owned banks to joint-owned ones – Foreign banks’ business was halted; foreign currencies were prohibited circulating in China – Others were transformed to joint-owned (private and government) banks History of PBoC • 1953-1978: national bank in the planned economy – private banking industry almost disappeared – PBoC served the national institution that governed the whole financial sector and took the banking business – PBoC controlled both the sourcing and employment of capitals in the planned economy – PBoC took the responsibility of organizing and adjusting the money circulation by providing all sources of credits to state-owned firms, jointowned firms and even individuals. 1-26 History of PBoC • 1979-1992: transition from a national bank to the central bank – In 1978, China began to adopt the reform and opening-door policy – Various forms of financial institution (commercial banks, trusts, insurance companies) came forth, a central bank was necessary for the regulation – In Sept. 1983, State Council decided to have the PBoC function as a central bank with the separation of ICBC 1-27 History of PBoC • 1979-1992: transition from a national bank to the central bank – PBoC took the status of central bank from Jan 1st, 1984 – Focused on setting and implementing monetary policy, controlling the total amount of credit and stabilizing commodity prices – Lending and depository business was transferred to Industrial and Commercial Bank of China – The required reserve and rediscount rate system (lending to specialized banks) was set up 1-28 History of PBoC • 1993-present: reinforce and complete the role of central bank – Commercial banking and policy banking gradually striped since 1993 – The Law of the People's Republic of China on the People's Bank of China passed by the Third Plenum of the Eighth National People's Congress on March 18, 1995 , legally confirmed the PBoC's central bank status 1-29 History of PBoC • 1993-present: reinforce and complete the role of central bank – CSRC and CIRC established in 1992 and 1998, security and insurance regulatory function of PBoC striped; – The draft amendment of Law on the People‘s Bank of China passed on Dec 22, 2003 – CBRC established in 2004 to supervise the financial industry 1-30