quarta-feira, 25 de abril de 2012

People's Bank of China - João Ricardo Trevisan de Souza


History
The Peoples Bank of China was established in the year 1948 as a state-owned “monobank”, a necessary institution to succeed in the creation of  a socialist society. From the day of its creation till 1979, it performed the functions of a Central Bank -issuance of money, last resort lender, finance the government, etc.- and also the functions of a general bank -financing investments, collecting deposits, etc.- (Chung and Tongzon, 2004).
In 1983, after the reforms in the Chinese economy, PBC was relived of its general banking duties and was required to act exclusively as a Central Bank . In 1995, The Law of the People’s Republic of China on the People’s Bank of China legally stated the PBC status as the monetary authority in China. According to Yi-feng Tao (2011), the PBC Law determined, for the first time, that the principal goal of the People's Bank of China is to guarantee monetary stability and directly finance  of government overdraft is not allowed.
In 2003, the functions of the PBC were strictly defined as:
- Drafting and enforcing relevant laws, rules and regulations that are related to fulfilling its
functions;
- Formulating and implementing monetary policy in accordance with law;
- Issuing the Renminbi and administering its circulation;
- Regulating financial markets, including the inter-bank lending market, the inter-bank bond
market, foreign exchange market and gold market;
- Preventing and mitigating systemic financial risks to safeguard financial stability;
Administrative Organization
As in the case of the Brazilian Central Bank, the People's Bank of China centralize the decisions on an institutional body called Monetary Policy Committee. This Committee is composed of PBC's Governor and two Deputy Governors, a Deputy Secretary-General of the State Council, a Vice Minister of the State Development and Reform Commission, a Vice Finance Minister, the Administrator of the State Administration of Foreign Exchange, the Chairman of China Banking Regulatory Commission, the Chairman of China Securities Regulatory Commission, the Chairman of China Insurance Regulatory Commission, the Commissioner of National Bureau of Statistics, the President of the China Association of Banks and an expert from the academia.
Concerning this decision making body, there are some important issues that should be highlighted:
Firstly, a very interesting peculiarity of the chinese Monetary Policy Committee is that it also includes one member of the academia. According to Yi-feng Tao (2011), until the moment, the Committee succeeded in appointing the highly respectable financial economists to the position, namely, Huang Da, Wu Jinglian, Li Yang,  Yu Yongding and Fang Gang. This peculiarity of the PBC is, in fact, a very important distinction. Bringing a member of the academia provides the Committee with more analytical skills and a different evaluation of the monetary scenario and macroeconomics conditions, therefore, it raises the PBC's potential ability to create public value.
Secondly, according to the law, the composition, responsibilities, and working procedure of the group is established by the State Council and shall be filed by the Standing Committee of the National People's Congress. This characteristic of the decision making process has been a target for several critics in recent years. Yi-feng Tao (2011), points out that the overall direction of the monetary policies is still determined by the Premier. Likewise, Chung and Tongzon (2004) states that the necessity of the State Council's approval makes the PBC an agency that is still subordinated to the wills of other branches of the government.
Finally, Chung and Tongzon also consider the leadership appointment a flaw in the system. According to the authors, “there are no specification on the type of desired qualification  or terms of service for both the governor and deputy governors” and consequently “the State Council is... in a strong position to nominate or appoint persons who are "loyal" to the government and easily dismiss nonconformists when necessary”. The authors consider this lack of independence a weakness of the institution and an obstacle to the monetary policy.
Mission Statement
Unlike the Brazilian Central Bank, the People’s Bank of China does not have a clear mission statement written on its website. On the other hand, in 1998, the institution included in the Annual Report a section named “Major Responsibilities of the People’s Bank of China”. This section of the report list several items that are considered key for the PBC.
Below one can see the most important items of the list, selected according to the purposes of the paper:
- Make and conduct monetary policy according to laws and regulations; make credit policy on a macro level and provide guidance to financial institutions accordingly
- Make and conduct RMB exchange rate policy, improve RMB exchange rate formation mechanism, maintain equilibrium of the balance of payments account, carry out foreign exchange administration, follow developments in the international financial markets and provide risks warning accordingly, monitor and manage cross-border capital flows, and hold manage the foreign exchange ad gold reserves
- Undertake the obligation as the lender of last resort and inspect the behaviors’ of institutions’ in which the central bank injects funds in order to resolve financial problems - - -Issue RMB banknotes and coins, and manage RMB circulation
-Undertake other assignments from the State Council.
The list issued on 2008, however, does not fulfill the requirements of a statement mission as defined by Moore (2003), more specifically, maintaining managerial focus, identifying key political and administrative tasks, and mobilizing external and internal support . On the contrary, it just lists all the functions performed by the bank.
On PBC’s official website, on the section Monetary Policy, it is possible to find another mission statement candidate. Below one can read the words from the website:

“The objective of the monetary policy is to maintain the stability of the value of the currencyand thereby promote economic growth.”
As clearly defined in the sentence, this mission statement is concerning only the monetary policy and not the whole institution.  It is analogous to the second part of the Brazilian Central Bank's statement mission ( “To ensure the stability of the currency purchasing power”), however, it includes the promotion of economic growth together with the stability of the value of the currency which can make a big difference in the way the Central Bank interfers in the economy.
Tools
PBC's official website lists five instruments that are used as tools to  maintain the stability of the value of the currency and thereby promote economic growth. These instruments are: reserve requirement ratio, central bank base interest rate, rediscounting, central bank lending, and open market operation. Besides that, the State Council can also require the PBC to make use of a different policy instrument if it deems suitable.
Two important peculiarities of PBC's policy instrument list should be highlighted. Firstly, instead of the exclusive use of the interest rate, the People's Bank of China utilize a mix of measures to control inflation. Secondly, PBC is, as mentioned before, subordinated to the State Council.
In order to analyze how this mix of policies is put in practice, it is essential to scrutinize the Monetary Policy Reports available on PBC's website. In this section of the paper, the two most recent publications will be used.
China Monetary Policy Report, Quarter one 2011 (May, 2011) reveals some of the
characteristics of the current strategic monetary policy adopted by the PBC. According to the report, the reserve ratio requirements was hiked four times by two hundred basis points and the benchmark deposit and loan interest rate raised two times by fifty basis point. This measures were taken in order to curb a serious inflationary process that took place in China in the beginning of  2011 (China Daily, 2011).
         Besides that, in order to make the monetary policy more efficient, PBC implemented macro- prudential regulatory policy framework aimed at creating proper incentives to financial institutions. The same report also indicates the challenges of the monetary policy and states the goals for the coming period :
“Efforts will be made to strike a balance between controlling money aggregates and structural improvement, and between promoting economic growth and containing inflation. For the time being, as the economic growth and employment situations remain favorable, the key is to stabilize the general price level and to manage inflation expectations.”
As one can see, controlling the inflation was indeed the primary goal of the PBC during this time.
China Monetary Policy Report, Quarter two 2011 (August, 2011)  once more clearly defines the  goal of the monetary policy:
“Since the beginning of 2011, the PBC, in accordance with the overall arrangements of the
State Council, took inflation control as the top priority of macro-economic management”
Reserve requirement ratio and benchmark loan and deposit interest rates were once more raised. Macro-prudential measure were also taken. It is important to note that issues related to exchange rate are covering part of the report. In this paper, however, this issue will not be properly addressed. The study of those issues goes beyond the scope of a comparative study for the Brazilian Central Bank does not control the exchange rate.
To sum up, controlling the raising inflation has been the primary goal of the monetary policy in China since, at least, the beginning of 2011. Hence, it is possible to state that BCB and PBC were both chasing the same goal during the first semester of the present year. Nevertheless, the tools used to reach the objective were different. While the Brazilian Central Bank mainly utilized the benchmark interest rate, People's Bank of China chose to curb inflation by using a mix of policies.
        

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