2016/9/20 Media News Chinese financial markets Sept 15, 2016: Bank of England leaves interest rates unchanged Part 1: Central Bank and pboc MPC holds Bank Rate at 0.25 ins government bond purchases at d see if the economy can continue to weather the initial shock of the Brex By Zhang Xiaorong 025%E10 Fudan University, Shanghai, China Media News Monetary Authority July 27, 2016: Fed Keeps Rates Unchanged Monetary authority" is a generic term in finance and economics for the entity which controls the supply of of 0. 25% to 0.50%)but risks to the u.s. economic outlook had diminisher ther parameters which control the cost and availability of Generally, a monetary authority is a central bank: the Federa ng in June. It added that househo Reserve: People s Bank of China; Bank of Japan Other arrangements: ECB; HK Monetary Authority; Free king where a broad range of entities can issue notes ss worry about possible shocks that could push the U.S. economy off Monetary Authority Monetary Policy at determine the size and rate of owth of the money supply, which in turn affects interest creasing the supply of money to stimulate the economy when it,s in recession 1
2016/9/20 1 Chinese Financial Markets Part 1: Central Bank and PBoC Sept.‐Dec.2016 By Zhang Xiaorong Fudan University, Shanghai, China 1-1 Media News • Sept.15, 2016: Bank of England leaves interest rates unchanged – All nine MPC members took the wait‐and‐see approach by voting to stick with the measures announced in August – MPC holds Bank Rate at 0.25% maintains government bond purchases at £435bn and corporate bond purchases at £10bn – The Bank of England left the door open to another interest rate cut this year but decided that the safest option for now was to wait and see if the economy can continue to weather the initial shock of the Brexit vote. 1‐2 Media News • July 27, 2016: Fed Keeps Rates Unchanged – The Federal Reserve left interest rates unchanged on Wednesday (left its benchmark overnight interest rate in a range of 0.25% to 0.50%) but said near‐term risks to the U.S. economic outlook had diminished, opening the door to a resumption of monetary policy tightening this year – The U.S. central bank said the economy had expanded at a moderate rate and job gains were strong in June. It added that household spending also had been "growing strongly," and pointed to an increase in labor utilization. – While Fed policymakers said they continued to closely monitor inflation data and global economic and financial developments, they indicated less worry about possible shocks that could push the U.S. economy off course. 1‐3 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. 1‐4 Monetary Authority 1‐5 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. 1‐6
2016/9/20 Central Bank Intermediation Central Bank Intermediation (Monetary Policy) BALANCE SHEET Instruments of Monetary policy Reserve Requirements In general, central banks adjusts the money supply equired reserve The amount of money that banks are required to that commercial banks can lend to the business keep on deposit at the central bank for the Usually measured in the percentage of a banks total deposit i.e. deposit reserve ratio Open Market Repurchase Agreements aising(or cutting) RRR means the total money that be lent (from the commercial banks )to the business sector is reduced (or enlarged Reserve Requirements Open Market Operations 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 eserve The central bank reduces money supply by selling Deposit reserve rate bonds to primary dealers(security firms and commercial banks)and decreasing the balance The interest rate that the central bank pays on the that banks can lend required reserve and the excess reserve Purchase of government securities injects money into the banking system and stimulates growth
2016/9/20 2 Central Bank Intermediation (Monetary Policy) 1‐7 Central Bank Intermediation (Monetary Policy) 1‐8 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 1‐9 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). 1‐10 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 1‐11 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. 1‐12
2016/9/20 Open Market Operations Open Market Repurchase Agreements Repurchase Agreement(Repo) Reverse Repurchase Agreement An agreement with a commitment by the seller The central bank senis secu rities 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 It represents a collateralized short-term loan where 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? sector. The wording in China is different. Discount rate Discount Rate he US Fed Discount rate Proceeds from discount loans are also the interest rate charged to commercial bar reserves and increase the banks capacity in other depository institutions on loans they making loans from their regional Federal Reserve Bank facility--the discount window, i. e, the cost of n increase in the discount rate discourages capital financed by the central bank. anks from borrowing from the Fed, thereby Discount windows provides very short-term the total amounts of loans provided to firms. vernight)loan extension, short-term loan a decrease in the discount rate encourages extension and seasonal credit extension to banks to borrow from the fed Monetary Policy Monetary Aggregates Monetary policy aims to controlling the total Intuitively, the more money issued, the more investment activities in the real economy, and the higher the growth and the pressure for How do we calculate the total amount of money in the economy?
2016/9/20 3 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. 1‐13 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. 1‐14 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. 1‐15 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. 1‐16 Monetary Policy Easing Tightening Required Reserve Ratio Open Market Operation Repo Reverse Repo Discount Rate 1‐17 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? 1‐18
2016/9/20 Monetary Aggregates Monetary Aggregates Monetary Base ·Mo base money high-powered money includes cash or assets that could quickly be 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 transaction deposits(demand deposits )at -The central bank uses monetary policy to depository institutions(commercial banks, savings adjust the amount of reserve of commercial and loan associations, savings banks, and credit banks, i.e., the money supply Monetary Aggregates The US M1 and M2 Stock(in $BIn) M2 comprises M1, savings(including money market deposit accounts), small-denomination time deposits(time deposits, including retail purchase agreements, in amounts of less than 00 000 dollars), and balances in retail money market mutual funds Economists usually use"broad money"to describe M2 is the commonly used measure of broad money ::是 M2 Stock in Major Economies China Monetary Aggregates(M2) (in Trillion Local Currency) and GDP (in tIn RMB 2008 2016 AUG Growth Rate uro zone 7420 ustralia 36.7 182% 语昌自昌到昌司是舞司 Canada echa M2
2016/9/20 4 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 1‐19 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) 1‐20 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. 1‐21 The US M1 and M2 Stock (in $Bln) 1‐22 0 2000 4000 6000 8000 10000 12000 14000 2000‐01 2000‐07 2001‐01 2001‐07 2002‐01 2002‐07 2003‐01 2003‐07 2004‐01 2004‐07 2005‐01 2005‐07 2006‐01 2006‐07 2007‐01 2007‐07 2008‐01 2008‐07 2009‐01 2009‐07 2010‐01 2010‐07 2011‐01 2011‐07 2012‐01 2012‐07 2013‐01 2013‐07 2014‐01 2014‐07 2015‐01 2015‐07 2016‐01 M1 M2 M2 Stock in Major Economies (in Trillion Local Currency） 2008 2016 AUG Growth Rate China 47.5 151.1 218% US 8.2 13.0 59% Euro Zone 8.1 10.5 30% Japan 742.0 942 27% Australia 1.2 1.9 58% UK 1.8 1.6 ‐11% Russia 13.0 36.7 182% Canada 0.9 1.4 56% 1‐23 China Monetary Aggregates (M2) and GDP (in tln RMB) 1‐24 0 20 40 60 80 100 120 140 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 China GDP China M2
2016/9/20 China M2/GDP Broad Money as %of GDP China 2-1x 119.0 2008 150084320911666129.1 176.69042270170.61360 177584722611687 1312 20111759872238015531314 2012 1824 878241.3153.0 133.3 20131882884247815091344 2014 1930 1399 Source: World Ba Monetary Policy Example Example: the US Fed the us fed and 911 Attack · The Fed' s Mission Official Duties " The Federal Reserve System is the central bank of Conducting national monetary polic the United States. It was founded by Congress in regulation of other banking entities to protect 1913 to provide the nation with a safer, more consumer credit rights flexible, and more stable monetary and financial maintain national financial security system. Over the years, its role in banking and the economy has expanded. The Federal Reserve Website Example: the US Fed Response of the Fed to 9/11 Structure of the Federal Reserve Aim: To increase liquidity and All appointed by the president maintain financial confidence Current chairman -Janet Yellen · How was this achieved? Board of directors 1. Open market operations 2 federal reserve bank 2 committees: Federal Open Market Committee-Monetary 3. Daylight overdraft fees scrapped 4. The establishment of Swap Federal Advisory Council- Advisory Board 5
2016/9/20 5 1‐25 China M2/GDP 0.82 0.89 0.940.990.971.00 1.07 1.15 1.24 1.341.36 1.44 1.54 1.631.591.621.60 1.521.51 1.781.811.80 1.88 1.951.93 2.06 0.80 1.00 1.20 1.40 1.60 1.80 2.00 2.20 Broad Money as % of GDP China USA Japan UK Korea 2005 152.2 71.9 206.6 122.5 111.1 2006 158.8 74.1 204.0 132.1 119.0 2007 150.5 79.2 202.8 145.0 122.1 2008 150.0 84.3 209.1 166.6 129.1 2009 176.6 90.4 227.0 170.6 136.0 2010 177.5 84.7 226.1 168.7 131.2 2011 175.9 87.2 238.0 155.3 131.4 2012 182.4 87.8 241.3 153.0 133.3 2013 188.2 88.4 247.8 150.9 134.4 2014 193.0 89.5 251.2 140.9 139.9 2015 205.7 90.3 251.9 137.8 144.2 Source: World Bank 1‐26 Monetary Policy Example: the US Fed and 911 Attack • The Fed’s Mission – "The Federal Reserve System is the central bank of the United States. It was founded by Congress in 1913 to provide the nation with a safer, more flexible, and more stable monetary and financial system. Over the years, its role in banking and the economy has expanded.” ‐ The Federal Reserve Website 1‐27 Example: the US Fed • Official Duties – Conducting national monetary policy – regulation of other banking entities to protect consumer credit rights – maintain national financial security – provides financial services to the US Government, official foreign institutions, and helps manage the nation's payment system 1‐28 Example: the US Fed • Structure of the Federal Reserve – All appointed by the president – Current Chairman ‐ Janet Yellen – Board of Directors – 12 federal reserve banks – 2 committees: • Federal Open Market Committee ‐ Monetary Policy • Federal Advisory Council ‐ Advisory Board 1‐29 Response of the Fed to 9/11 • Aim: To increase liquidity and maintain financial confidence • How was this achieved? 1. Open market operations 2. Direct lending of funds via the Discount Window 3. Daylight overdraft fees scrapped 4. The establishment of 'Swap Lines' 5. 50 basis points cut 1‐30