China’s monetary policy in response to the international financial crisis
In September 2008, in response to the severe impact of the international financial crisis, China’s monetary policy became moderately loose. At the beginning of 2009, the State Council proposed that M2 growth for the whole year be about 17% and new loans exceed 5 trillion yuan. Compared with the expected GDP growth rate of 8% and the CPI indicator of 4%, this is still a moderately loose monetary policy. This shift in China's monetary policy is correct. It effectively cooperates with the government's active fiscal policy and has a significant effect on economic stabilization and recovery. However, there are also some problems in its implementation that deserve in-depth discussion.
This article is divided into two parts: The first part discusses foreign experiences in responding to financial crises as a reference for China’s monetary policy. The second part is a discussion of China's monetary policy, including describing the monetary policy adjustment mechanism and experience, evaluating it and proposing countermeasures.
International experience in monetary policy in response to financial crises
International experience
(1) M. Friedman’s discussion of the Great Depression from 1929 to 1933< /p>
In 2008, an excerpt of "The Monetary History of the United States" co-authored by M. Friedman and Anna Schwartz was published in China. The English title is The Great Contraction, 1929-1933, which should be translated as "The Great Crunch" (referring to the money supply), but the Chinese translation is "The Great Recession". The change in the title of the Chinese translation is intended to attract people's attention, but it risks losing the author's original intention and warning! No discussion here.
Friedman and Schwartz divided the changes in U.S. monetary policy during the Great Depression into four stages, of which three stages implemented tightening policies and one stage implemented loose policies. The first stage was from the spring of 1928 to October 1929. At the end of 1927, the U.S. economic cycle had just reached its bottom, prices were still falling, and there was no sign of inflation. However, because the Federal Reserve was worried about further intensification of stock market speculation, it adopted measures to suppress speculation by raising the discount rate, leading to further decline in prices and contraction of economic activity. The second stage was the monetary tightening stage after the pound crisis in September 1931. The run on gold by foreign forces triggered active and rapid actions by the Federal Reserve, which rapidly raised the discount rate in a very short period of time, leading to the bankruptcy of a large number of commercial banks and the decline of industrial output and prices. The third stage is the monetary easing stage, which began in April 1932. Congress put heavy pressure on the Federal Reserve, requiring the latter to relax monetary policy. The Federal Reserve was forced to inject liquidity into the market to make the economy show signs of recovery. When the Federal Reserve ended this policy in July 1932, the economy was back in trouble. The fourth stage was the banking industry holiday period from January to March 1933. The president has not yet taken office, and future policies are very uncertain. Bank failures and the Fed's response to the gold run have led to a further decline in the currency stock, causing the most severe economic downturn.
Research by Friedman and Schwartz shows that from the economic peak in August 1929 to the economic bottom in March 1933, the U.S. money stock fell by 1/3, corresponding to the 1929 ~The Great Depression of 1933. “These experiences have tragically proven the importance of monetary factors,” and also highlighted the key role of monetary policy orientation.
Yan Yanming: The international monetary policy landscape and its impact on the Chinese economy
At present, international economic development has not yet emerged from the haze of the international financial crisis. The recent outbreak of war in Libya, the impact of the Japanese earthquake, tsunami and nuclear radiation crisis on the international economy, the European sovereign debt crisis, and the uncertainty of the situation in the Middle East and North Africa. These complex factors will make the global economic recovery face many new challenges. Developed countries such as the United States and Japan have adopted expansionary monetary policies to promote their economic recovery; China, which has recently become the world's second largest economic power, has adopted monetary tightening measures many times since last year. At this critical juncture when the RMB continues to appreciate and the global economic recovery is sluggish, the impact of various countries' monetary policies on China's economic development will ultimately affect the process of global economic recovery.
Loose externally and tight internally: changes in domestic and foreign monetary policies
Currently, the introduction of economic policies in various countries faces dilemmas. From a broad perspective:
On the one hand, global economic recovery has been affected by a variety of negative factors, and there is still a long way to go to get out of the crisis. Although the United States, the world's economic leader, has recently seen significant improvements in economic growth, employment growth, housing sales and other data (according to data released by the U.S. government, GDP grew at an annualized rate of 2.6% and 2.9% in the third and fourth quarters of 2010; overall employment is relatively weak. However, it is getting better, with non-agricultural employment increasing; the unemployment rate has dropped to 8.9%). However, many of the aforementioned negative factors in the international economy may prevail in the future, so some countries represented by the United States may have to continue. Adopt loose monetary policy.
On the other hand, global inflation is fierce. Since last year, affected by factors such as the war in Libya, international crude oil, grain, metals, iron ore, rare earth and other bulk commodity prices have all risen sharply. Among them, international crude oil futures prices have soared to a 29-month high, and international grain prices have also reached nearly two-month highs. The highest since last year.
As the U.S. dollar exchange rate continues to slump, precious metals as safe-haven investment objects are sought after. The price of gold futures on the New York Mercantile Exchange has risen by 70% since the end of 2008. How to deal with the fierce international inflation has increased the pressure on countries to implement tightening monetary policies.
Looking at the monetary policies of various countries around the world and recent trends, they can be roughly divided into three different directions:
The first is the loose monetary policy represented by the United States and Japan. Looking at the situation in the United States, since the outbreak of the financial crisis in 2008, the Federal Reserve has launched the largest quantitative easing measures in history, with a scale of US$1 trillion; in September 2010, due to poor U.S. economic data, the Federal Reserve launched another The second quantitative easing policy, with a scale of US$600 billion, was implemented in phases. Japan's loose monetary policy was more passive. Its economic situation originally showed signs of recovery, but the sudden earthquake, tsunami and nuclear radiation crisis had a heavy impact on the Japanese economy. In fact, since the financial crisis, the Bank of Japan has cut its benchmark interest rate to zero; and data from the International Monetary Fund (IMF) show that due to the long-term use of loose economic policies, Japan’s public debt relative to GDP in 2010 The ratio has exceeded 200%; after the earthquake, Japan will implement a huge loose monetary policy plan. From earthquake relief to post-disaster reconstruction, it may eventually exceed 70-100 trillion yen (about 500 billion U.S. dollars). Its main mode of operation is to issue government bonds to expand currency issuance.
The second is the wait-and-see monetary policy represented by European countries. Unlike the United States and Japan, the situation in European countries is more complex and subtle. The European debt crisis that has been developing since the beginning of last year has had a negative impact on European monetary policy, forcing it to continue to adopt loose monetary policies. At the same time, the increasingly severe inflation situation has also forced Europe to promptly consider the change in the direction of monetary policy, that is, the withdrawal of loose monetary policy. The Governing Council of the European Central Bank held a monetary policy meeting at its headquarters in Frankfurt, Germany, on March 3 and decided to maintain the benchmark interest rate at 1% in the near future. But the risk of higher inflation in the euro zone is growing due to rising commodity prices such as oil. It may take some time to wait and see whether the direction of monetary policy will be changed.
The third is the tightening monetary policy represented by China. Since the second half of last year, the Chinese government has made a choice to gradually tighten monetary policy in response to changes in the domestic and international economic environment, especially the factors of high CPI, thus becoming "unique" among global loose monetary policies. The main measures are reflected in: First, since October 2010, the central bank has decided to raise the benchmark interest rate for RMB deposits and loans of financial institutions three times in a row, with the cumulative rate of increase reaching 0.75%; since last year, China has raised the deposit reserve ratio nine times in a row, and the most recent The move to raise this indicator on March 25, 2011 is expected to freeze bank funds of approximately 360 billion yuan, while the reserve ratio of large commercial banks has also reached a historical high of 20%.
The impact of changes in domestic and foreign monetary policies on China's economy
Faced with the loose monetary policies generally implemented by major post-industrial countries in the world, China seems to be facing the challenges of global monetary policy. It is not easy to continue to maintain a tight monetary policy under a comprehensive "siege". Specifically, the impact of changes in domestic and foreign monetary policies on China's economy is mainly reflected in the following aspects:
1. Imported inflationary pressure has become more intense. China is the world's largest manufacturing country and one of the major importers of bulk industrial raw materials and agricultural products. In industrial production, China needs to import large amounts of raw materials such as iron ore, crude oil, and nonferrous metals, making it highly dependent on foreign trade. Chinese customs statistics show that my country’s crude oil imports in January this year were 21.8 million tons, worth US$14.18 billion. In addition, China's iron ore demand accounts for more than 60% of the world's demand, steel demand accounts for about 50%, and copper and aluminum demand are close to 40%. The continued rise in prices of various commodities since last year has triggered global inflation, and China's industrial production is facing huge pressure from imported inflation. According to data released by the China Bureau of Statistics, China's factory price index (PPI) for industrial products has maintained a growth trend for 16 consecutive months. Tracing back to the source, the reason for the surge in international commodity prices is the exaggerated excessive issuance of currency by major developed countries.
2. The pressure for RMB exchange rate appreciation continues to increase across the board. Judging from the exchange rate of the RMB against the U.S. dollar, since China announced in 2005 that it would abolish its original monetary policy pegged to a single U.S. dollar and begin to implement a managed floating exchange rate system based on market supply and demand and adjusted with reference to a basket of currencies, the RMB exchange rate reform has The exchange rate basically shows a unilateral trend of rising all the way. Since the People's Bank of China announced on June 19, 2010 to further promote the reform of the RMB exchange rate formation mechanism, the appreciation of the RMB has continued unabated, the characteristics of two-way floating have become increasingly obvious, and the flexibility of the exchange rate has increased significantly. However, affected by the quantitative easing policy launched by the United States last year, the RMB exchange rate has repeatedly reached new highs. Based on the central parity rate, the RMB has appreciated by 4% since June 19, 2010.
In addition, judging from the exchange rate of RMB against the Japanese yen, since the Japanese economy was severely weakened after the earthquake, the Japanese government, in order to restore Japan's economy after the earthquake and boost Japan's exports, also acquiesced or even promoted the continued depreciation of the Japanese yen in order to increase Japan's exports of goods. competitiveness, which directly led to the recent sharp decline of the Japanese yen. The United States, Japan and other countries are China's important economic and trade partners. The continued decline of their exchange rates will inevitably put China's exports under tremendous pressure, and the import and export pattern will undergo changes that are unfavorable to China.
3. International hot money fuels capital bubbles. China has implemented a tightening monetary policy unequivocally among sovereign countries in the world. In an environment where the global economic trend is uncertain, investing in China can obviously bring additional benefits of rising exchange rates and relatively high interest rates to international hot money. However, China has been in the midst of the international financial crisis. The outstanding performance also provides an excellent "safe haven" for international hot money. Although China still implements relatively strict capital account controls and foreign capital cannot enter and leave China at will, through various workarounds, a large amount of foreign capital has actually entered the country "lurking". In recent years, the balance of payments data released by China's foreign exchange administration authorities have shown a pattern of continued "double surplus" in the current account and capital account. According to statistics, in 2010, my country's current account surplus reached US$305.4 billion, an increase of 17% over the previous year; the capital and financial account surplus was US$226 billion, an increase of 25%. International funds pouring into the country through various means will inevitably trigger asset bubbles wherever they go: Partly affected by this, in recent years, China's real estate prices, led by first-tier cities such as Beijing and Shanghai, have intensified. Currently, nationwide The growth in housing prices in many second- and third-tier cities in China is also difficult to contain. This hot money is like a time bomb. While it is constantly exacerbating China's real estate and capital market bubbles, it may detonate China's capital bubble at any time due to changes in the international situation, resulting in huge potential risks.
4. The huge risk of China’s foreign exchange reserves. China has been the country with the largest foreign exchange reserves in the world for many consecutive years. At the end of 2010, the scale of foreign exchange reserves was US$2.847338 billion, most of which were US dollar assets. The continued depreciation of the U.S. dollar actually causes China to face a continued decline in wealth. In order to effectively avoid the risk of US dollar depreciation, the central government has been exploring reducing the proportion of US dollar assets, increasing its holdings of European debt, and further increasing its holdings of Japanese debt and currencies of emerging market countries. According to a report released by the Japanese Ministry of Finance on August 9, 2010, China purchased a net 456.4 billion yen (approximately US$5.3 billion) of Japanese government bonds in June, marking the sixth consecutive month of net purchases of Japanese government bonds; The total increase in Japanese government bond holdings in the first half of 2010 was 1.73 trillion yen, which was almost seven times the total amount in 2005 based on the exchange rate at that time. However, Japan's assets are not safe: its 200% debt ratio has reached the limit of the country's debt. To further implement expansionary financial policies of issuing bonds and issuing additional currency is undoubtedly a huge risk. If the resulting potential crisis materializes, it will have a huge impact on the stability of the Japanese yen and global foreign exchange and capital markets, especially the management of China's huge foreign exchange reserves.
Conclusion
Under the monetary policy pattern of external loosening and internal tightening, China's economy has been affected by many aspects, among which negative impacts dominate. Under this circumstance, when the Chinese government further studies and adopts a tightening monetary policy, it must consider it from a broader global perspective. Although the goal of curbing inflation is extremely important, in the global loose monetary policy environment, China should be more cautious in adopting tightening monetary policies and strive to achieve overall coordination with the international monetary environment. At the same time, we can also actively take various measures to effectively avoid the adverse effects of the international monetary environment: for example, we can explore orderly expansion of RMB return channels to alleviate the pressure of continued growth in foreign exchange reserves caused by "double surpluses"; another example is , continue to expand the signing of local currency swaps and local currency settlement agreements with neighboring countries, encourage swap funds to be used for trade investment, minimize trade risks caused by international exchange rate fluctuations, and ease the upward pressure on export prices; as another example, as With the improvement of the international status of the RMB, China should actively promote the demand of overseas monetary authorities to include the RMB in their foreign exchange reserves; for another example, while effectively curbing the rapid rise in real estate prices, it should open the capital account more prudently and actively explore and improve targeted measures. Early warning system and monitoring system for international hot money. Through a comprehensive policy mix, we will ensure the realization of macroeconomic policy goals such as relative balance of international payments, relative price stability, and stable economic development, and make new contributions to the global economy emerging from the shadow of the international financial crisis as soon as possible.
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