The People's Bank of China lowered its reserve requirement ratio and injected funds into the economy in an attempt to stimulate growth. However, the timing of these actions was poor as it went against recent assurances and weakened the yuan more than expected. The PBC recommends a transition to a more flexible exchange rate over time to regain monetary policy independence while avoiding a floating currency that could lead to panic. This would help boost confidence and ease capital outflows driven by economic fears.

1. The People’s Bank of China (PBC)
Shawn Grewal
Ting Situ
Ian Du
Herman Lu
Gary Vartanian

2. Introduction

3. History/Why was it Established?
The People’s Bank of China (PBC) was established on December 1, 1948
 It was created in order to take over the role of the Central Bank of the Republic of China which operated as China’s
central bank from 1927 – 1949
 This central bank, however, moved to Taiwan with the Taiwanese government following the Chinese Civil War
 The PBC was based on the consolidation of the Huabei Bank, the Beihai Bank, and the Xibei Farmer Bank
 It was initially headquartered in Shijiazhuang, Hebei, but then moved to Beijing in 1949
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PBC
Huabei
Bank
Beihai
Bank
Xibei
Farmer
Bank

4. History (cont.)
The PBC was originally the only bank in the People’s Republic of China
 All other banks within the mainland (such as the Bank of China) operated as either subdivisions under it or as
agencies that didn’t hold deposits
 Furthermore, it was responsible for both central banking as well as commercial banking
However, in the late 1970s and early 1980s, widespread economic reform swept China
 As part of this reform, the PBC’s commercial banking operation was divided into 4 independent, state-owned banks
 Consequently, this allowed it to function solely as a central bank by 1983
 This central bank status was legally confirmed in 1995 by the 3rd Plenum of the 8th National People’s Congress
 However, it still had supervisory responsibilities over the financial sector
In 1998, the PBC went through a major restructuring
 All local and provincial branches were abolished and it opened 9 regional branches
 These regional branches’ boundaries did not correspond to local administrative boundaries
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5. History (cont.)
Finally, in 2003, an amendment was passed that granted the PBC a much more prominent role in China’s
macroeconomic management
 The Standing Committee of the 10th National People’s Congress approved an amendment to create the China
Banking Regulatory Commission
 This agency took over the PBC’s supervisory responsibly such as overseeing reform and regulation of the
banking sector
 This allowed the PBC to focus exclusively on making and implementing monetary policy
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1948
PBC established
1983
Commercial banking
operation divided among
4 state-owned banks; PBC
allowed to function solely
as a central bank
1995
Legal status as a central
bank confirmed
1998
Major restructuring; local
and provincial branches
abolished; 9 regional
branches formed
2003
China Banking
Regulatory Commission
formed to supervise
financial sector; PBC now
able to focus exclusively
on monetary policy

6. Organization
How is the PBC organized?
 It has 9 regional branches, 2 operations offices, 303 municipal sub-branches, and 1,809 county-level sub-branches
 In addition, the PBC has 18 functional departments (think of them as bureaus), all of which are outlined below
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General Administration Department
Legal Affairs Department
Monetary Policy Department
Financial Market Department
Financial Stability Bureau
Financial Survey and Statistics Department
Accounting and Treasury Department
Payment System Department
Technology Department
Currency, Gold and Silver Bureau
State Treasury Bureau
International Department
Internal Auditing Department
Personnel Department
Research Bureau
Credit Information System Bureau
Anti-Money Laundering Bureau (Security Bureau)
Education Department of the CPC PBC Committee

7. Monetary Policy Decisions
Who makes the monetary policy?
 Monetary policy and macroeconomic management is
carried out by the Monetary Policy Committee of the PBC
 This committee is composed of about 13 members
including the governor and 2 deputy governors of
the PBC
 The committee plays an advisory role on the basis of
comprehensive research on the macroeconomic
environment and the macro targets set by the government
 It operates under the guidance of and must report to the
State Council
How often does the committee make monetary policy
decisions?
 The PBC meets every quarter to analyze the domestic and
foreign macroeconomic situation and make or adjust
policy to maintain financial stability
 However, it may schedule an ad-hoc meeting given
extraordinary and unexpected circumstances if proposed
by the governor or endorsed by more than 1/3 of the
members of the committee
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PBC's Governor
2 Deputy Governors
Deputy Secretary-General of the State Council
Vice Minister of the State Development and Reform Commission
Vice Finance Minister
Administrator of the State Administration of Foreign Exchange
Chairman of the China Banking Regulatory Commission
Chairman of the China Securities Regulatory Commission
Chairman of the China Insurance Regulatory Commission
Commissioner of the National Bureau of Statistics
President of the China Association of Banks
Expert from the academia

8. Leadership
PBC’s management structure
 The top management of the PBC is currently composed of a governor and 9 deputy governors
 The governor is appointed into or removed from office by the President of China
 The candidate for governor is nominated by the Premier of the State Council and is approved by the National
People’s Congress
 The deputy governors are appointed into or removed from office by the Premier of the State Council
What are their duties/roles?
 The governor supervises the overall work of the PBC
 The deputy governors provide any necessary support to assist the governor fulfill his responsibilities
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9. Leadership (cont.)
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Zhou Xiaochua
Yi Gang Wang Huaqing Chen Yulu Pan Gongsheng
Fan Yifei Guo Qingping Zhang Xiaohui Yang Ziqiang Yin Yong

10. Monetary Policy

11. Economic Background
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12. Economic Background (cont.)
China’s exports / imports
 China’s exports and imports are about 22.6% of its GDP
 In 2015, the average price of imported goods decreased 10.9%, dragging down import growth
 Total import value: ￥10.4 trillion
 Total export value: ￥14.1 trillion
 In 2015, China had a trade surplus of ￥3.7 trillion
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13. Economic Background (cont.)
Who are China’s main trading partners?
 China’s main trading partners are the United States, Hong Kong, Taiwan, Europe, Japan, Australia, Germany, South
Korea, Brazil, Russia, and ASEAN countries (Indonesia, Malaysia, Philippines, Singapore, Thailand, Vietnam, Laos,
Myanmar, and Cambodia)
 Exports to the US and ASEAN grew rapidly this past year, while exports to Europe and Japan declined
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14. Economic Background (cont.)
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15. Economic Background (cont.)
China’s interest rates
 The average interest rate in China between the years of 1996 – 2015 is 6.35%
 In 2015, the PBC lowered the interest rate to 4.35%
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16. Economic Background (cont.)
Unemployment in China
 China has an average unemployment rate of 4.0%
 In 2015, the unemployment rate was the lowest since the 2008 financial crisis
 Urban register unemployment rate is 4.05%
 In recent years, there has been a gradual decrease in the demand for labor
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17. Objective
What is the PBC’s objective?
 The formal objective of the PBC’s monetary policy is “to maintain the stability of the value of the currency and
thereby promote economic growth”
 Inflation is the primary target of the PBC, facilitating the achievement of the other objectives (employment, growth,
balance in payments)
 China has a 4% goal for inflation
What instruments does it use to achieve this objective?
 The PBC uses a mixed set of monetary policy instruments
 Direct, quantitative controls
 Indirect, market-oriented instruments
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Direct,
quantitative
Indirect,
market-
based
Monetary
policy

18. Instruments
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Reserve
Requirement
Ratio
Lending and
Deposit Rates
Window
Guidance
Open Market
Operations

19. Instruments (cont.)
Reserve requirement ratio
 Top-down, direct monetary policy instrument
 Requires banks to hold a proportion of deposits in reserve
 Most actively used “standard” instrument
 Keys:
 Widely used because China’s banking sector plays a huge role in the Chinese financial system
 An important advantage of using this ratio as a policy tool is that it can be used to effectively freeze funds until
the bank decides on the ratio again
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20. Instruments (cont.)
Reserve requirement ratio (cont.)
 Ratios vary between 3 types of banks:
 Small & Medium Depository Institutions: 17.5%
 Large depository institutions: 19.5%
 Rural credit cooperatives and small financial institutions: 16%
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21. Instruments (cont.)
Lending and deposit rates
 Market-oriented monetary policy instrument
 The PBC sets a benchmark 1 year lending and deposit rates (rates at which banks charge their borrowers or pay their
depositors)
 2nd most actively used instrument
 Keys:
 Pre-1990, this was treated as a secondary instrument
 Post-1990, this gained popularity due to a series of interest rate liberalization steps initiated by the bank
 Most of the money market and bond interest rates are determined by the market, but the PBOC still controls the
benchmark deposit and lending rates
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22. Instruments (cont.)
Lending and deposit rates (cont.)
 Benchmark rates were cut four times in seven months between November 2014 and June 2015 in an attempt to
improve credit growth
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23. Instruments (cont.)
Window guidance
 Administrative monetary policy instrument
 Executive meetings with reps of selected financial institutions, usually from the Big Four state-own banks
 Purpose of these meetings is to exercise administrative pressure on financial institutions to act in line with official
prescriptions
 Keys:
 Window guidance has been crucial in preventing events of excessive credit expansion in the early 2000’s
 Since problems arose in industry specific sectors as opposed to economy wide, window guidance was aimed to
precisely target these problematic sectors rather than distort the entire economy
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24. Instruments (cont.)
Open market operations
 Market-oriented policy instrument
 Used sparsely pre-1990 just like interest rates due to limited knowledge and experience in implementing it
 Only more recently, with the progressive development of foreign exchange and treasury bond markets, this
instrument has become increasingly important in China
 The PBC’s holding of government treasury bonds rose from 283 billion yuan in the 2nd quarter of 2007 to 1.6 trillion
yuan in the 4th quarter of 2007
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25. Monetary Policy Statement

26. Global Outlook
Global growth is slow
 Global GPD growth is now projected at 2.5%, which is 0.3% lower than the November outlook
 China’s financial uncertainty, decrease in commodity prices, and the slow growth of the US economy
Global trade
 Appreciation of the US Dollar has contributed to the fall in exports
 Chinese capital outflows at an alarming rate
 Chinese economy is shifting from a manufacturing economy to a services-based economy
Global investment
 Decline in energy prices have been so large that markets have considered higher default risks for banks
 Uncertainty regarding the global economic outlook, and capital outflow from China
 Unstable capital flows and high debt risks in emerging economies
 Appreciation of the US Dollar
 External liabilities in EME’s
 Rising borrowing costs
Global commodity prices
 Supply > Demand
 Lower commodity prices should help consumers but has actually slowed investment
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27. Global Outlook (cont.)
Global economic environment
 US: GDP and job growth has been disappointing
 Should remain stable, sustained by domestic demand
 Europe: economic environment has improved
 Should continue growing, driven by domestic demand
 Asia: growth is unlikely to improve
 Other emerging countries: slow and uncertain growth
 Decrease in oil and commodity prices
 Unstable capital flows and high debt risks
 Borrowing costs are rising, hurting EME’s with a lot of external liabilities
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28. Domestic Outlook
How does China’s economy look?
 The world’s second largest economy has been performing poorly
 Growth rate: 6.9%
 Short of the 7.3% growth rate in 2014
 Slowest pace since 1990
 Projected to decline to 6.2% by 2017 (OECD)
 Chinese exports fell by 11.2% in January year over year
 7th straight month of decline
 China’s Northeast is already in a deep recession
 Negative growth after factoring in deflation
 Imports fell by 18.8%
 15th straight month of decline
 Capital outflows at an alarming rate
 Estimated $1 trillion in 2015
 Growth is slowing and rebalancing from manufacturing to service
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29. Domestic Outlook (cont.)
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30. Domestic Outlook (cont.)
How does China’s economy look? (cont.)
 Currency depreciation
 Inflation rate of 1.8% in January 2016
 Unemployment remained stable at around 4.05%
 Growth in consumer spending and income did not fall as much
 Central government support
 Credit support from banks
 Declining reserves
 Dropped by around $500 billion
 Lowers confidence in the central bank’s ability to defend the currency
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31. Balance of Risk
What does China expect going forward?
 To “maintain the stability of the value of the currency and thereby
promote economic growth”
 Inflation projections:
 Target: 4% inflation
 Q1 inflation: 1.8%
 Expected yearly: 2.2-2.5%
 Much lower than expected :(
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32. Balance of Risk (cont.)
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Projected decrease in
output
Projected decrease in
current account

33. What’s Going On?
What’s going on with China?
 Between the stock market volatility, decreased
expectations, and capital outflow…
China has a problem!!!
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34. Impossible Trinity
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35. Cost?
Current downward pressure on currency
 Result → currency goes to maintenance
 From $3.438 trillion to $3.330 trillion
 Lost $108 billion
 Not much, but want to stop from accelerating
 What happens when out of reserves?
 Mexico Peso Crisis
 Asian Financial Crisis
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36. Why the Sticky Situation?
 IMF - Special Drawing Rights (SDR)
 China Policy – want stable currency
 Don’t want wild fluctuations, panic, suddenness, or uncertainty
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37. Which one not to Have?
 Loose Exchange Rate
 Wild fluctuation and devaluation in currency
 Sudden change leads to panic, crisis, and probably recession.
 Capital Controls
 Builds mistrust
 Usually associated with poor governance
 Most cases: did not support financial stability
 Lose Independent Monetary Policy
 Leads to loss in reserve
 Only have so much reserve
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38. Transition
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Fixed
Exchange Rate
Looser
Exchange Rate
Floating
Exchange Rate

39. Policy Recommendation
Conventional policies
 Lower Interest Rate
 Lower Reserve Requirement
 More flexibility with exchange rate (over course)
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Unconventional policies
 Chinese Quantitative Easing (QE)
 Rather than bankroll projects directly → PBC is
pumping funds into state lenders known as
policy banks to finance government-backed
programs
 Instead of buying shares to prop up a faltering
stock market → it’s aiding a government fund
that’s seeking to stabilize prices
 Instead of purchasing municipal bonds in the
market → it’s accepting such notes as collateral
and encouraging banks to buy the debt
“The first thing policymakers have to understand is that current outflows are driven by
fear. The constant swerving in policy that has marked the past year has done little to build
credibility with investors, whether foreign or domestic. If instead China demonstrated a
clear, unambiguous commitment to financial reform, that would reestablish trust and ease
at least some investor anxieties.” -Bloomberg
Lower interest
rate
Lower reserve
requirement
More flexible
exchange rate
Quantitative
easing
Healthy economy

40. What it’s Done
 Dropped RR by 0.5%
 RR 17% (still one of the
highest ratio)
 Injected 685 Billion Yuan
($105 billion)
 Reversal in the central bank’s
stance from two months ago
 BAD TIMING (credit)
 Just assured group of 20
finance chiefs it wouldn’t
weaken yuan
 Went ahead and weakened
the yuan
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41. Policy Recommendation (cont.)
Expanding currency leash (looser peg)
 Wiggle Room to use monetary policy
 Enough control to stop any wild fluctuations
 Gradual step to floating exchange rate
 Reduce the reserve loss rate
 Boost exports, spur inflation
More credibility
 Try making the Central Bank independent
 Have clear non-conflicting available data
 Clarity and availability
 Don’t go back on word
Cooperating with Third Party
 Cooperation with IMF or World Bank would increase credibility
 Make plan for next couple of years visible and stick with it
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Economists said with the yuan's inclusion in the IMF basket as a
reserve currency now looking like a formality, China should step
up efforts to build trust between global investors and its policy
makers.
-Bloomberg

42. Questions
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Q: What are the 4 instruments China uses to affect monetary policy?
A: Reserve requirement ratio, lending and deposit rates, window guidance, and
open market operations
Q: What 3 items compose the impossible trinity?
A: Free capital flow, a fixed exchange rate, and independent monetary policy