Analysis of Monetary Policy under Inflation in China
In the process of China's gradual marketization, the essence of China's economic reform is to establish an economic system in which the allocation of resources is mainly determined by the market. One side effect of economic reform is inflation, and the success of inflation control directly determines whether economic reform can continue. Under the circumstances that the total demand is greater than the total supply, and inflation is constantly appearing and intensifying, the macro-control of monetary policy has kept China's economy in a healthy and good development trend, showing great strength. At present, the main definitions of inflation by Chinese scholars are as follows: inflation refers to the excessive issuance of money, and the amount of money issued exceeds the demand for money; Inflation is the decline in the purchasing power of money, and the amount of money purchased now is less than in the past; Inflation means that the overall price level rises or continues to rise for a period of time, and the rising part of the price exceeds the falling part of the price, or the price only rises but does not fall. Among them, I think the first two definitions are more applicable to the inflation in China during the period of 1984~ 1997. At that time, the control tools of monetary policy mainly focused on the basic index of money quantity, which played an important role in controlling inflation. This paper makes a historical review of the monetary policy in contemporary China, trying to explain how the implementation of monetary policy regulates inflation, which can also be used for reference to the current economic situation in China. We can divide it into several stages for research and analysis:
I. Analysis of Monetary Policy from 1984 to 1986
1.1984 ~1986 the choice of the ultimate goal of monetary policy: anti-inflation.
Under the guidance of the policy at that time, China's economy entered a period of rapid growth from 1982. After more than two years of continuous expansion, in the fourth quarter of 1984, China's economy began to show obvious overheating momentum. In order to meet the rapid economic development and make up for the larger fiscal deficit, the central government began to issue more money. At the end of 1984, the cash in circulation reached 792 1000 billion yuan, up 49.5% year-on-year, which led to the skyrocketing inflation and the first "snap-up" since the reform and opening up. The total retail sales of 1984 in the fourth quarter was 94.4 billion yuan, an increase of 28.8% over the same period of 1983. In order to prevent the economic situation from deteriorating further, the central bank began to implement a monetary policy with the main goal of balancing credit and reducing inflation. The implementation of this monetary policy marks the transformation of China from planned economy to market economy and from administrative orders to macro-control. However, due to the low degree of market economy and imperfect monetary policy tools, the effect of monetary policy is not obvious.
2. 1984 to 1986 The choice of intermediate target of monetary policy: credit scale+money supply.
We can analyze the data in recent years, as shown in table 1:
1984~ 1986 China money supply growth rate
age
1984
1985
1986
M0
M 1
The second part of money supply
49.5
34.4
29.7
24.7
12.0
25.9
23.3
42.0
29.3
Table 1 Note: The data corresponding to M0, M 1 and M2 are the monetary growth rate of the current year compared with the previous year.
This economic overheating is mainly caused by out-of-control credit and excessive money supply. This stage is the stage of economic expansion. It can be seen that the scale of credit and the growth rate of money supply are significantly higher than those in other years. For example, the currency circulation in 1984 was 26.23 billion yuan, an increase of 49.5% over the previous year. In view of the overheated economy in 1984, the central bank began to shrink the money supply in 1985, and the M0 was reduced to195.7 billion yuan, and the growth rate of money supply dropped to 24.7% and 1986 to 23.3%. In fact, the excessive money supply of 1984 is mainly the result of commercial banks scrambling to lend money after the National Credit Planning Conference proposed a resolution to reform the credit fund management system. However, in addition to grabbing loans, various government-ordered loans were also one of the forms of unplanned loans at that time, and the breakthrough of planned credit was also expected. At the same time, price reform has also played an important role in the excessive money supply. Price reform was a wise move, but it formed the situation of "dual-track" price system at that time. As two different prices, planned price and market price are formed by two conflicting forces: administrative power and market mechanism. Under the dual price system, the government should give enterprises some money and subsidies, but the number of subsidized government officials has an important say. The focus of enterprises' work is not to strengthen market competitiveness, but to strengthen ties with the government. With the increase of subsidies to enterprises, the amount of funds will inevitably increase. Most economists in China believe that the disadvantages of the dual-track system outweigh the advantages. The dual-track system at that time was one of the reasons for inflation.
3. 1984 to 1986 Choice of monetary policy tools: mandatory plan of loan scale.
1985: the government uses the national foreign exchange reserves to narrow the purchasing power gap and return the currency; Strictly limit the scale of credit, adjust the interest rate of bank loans, and reduce the demand for investment in fixed assets; Recover within a time limit 1984 excess loans issued in the fourth quarter. 1986 implements the monetary policy of "seeking relaxation while maintaining stability": cancels the quota of loans granted by the People's Bank of China to specialized banks, and allows specialized banks to decide the loan scale according to actual needs and possibilities; On the basis of credit arrangement, the People's Bank of China is granting 5 billion yuan loans to specialized banks. The People's Bank of China allows its branches to use excess reserves to issue loans to promote local economic development.
Second, monetary policy analysis 1987~ 199 1 year
1.1987 ~1991the choice of the ultimate goal of monetary policy: anti-inflation.
In view of the inflation of 1986, the central bank started to formulate relevant monetary policies to curb inflation, but this round of monetary policy formulation was not successful. 1987~ 1988 is another stage of economic expansion. Driven by the early economic expansion, the price index continued to rise, reaching the first historical high since the reform and opening up. Based on 1985 price index, 1986 price index rose by 6.0%, 1987 price index rose by 13.7%, and 1988 price index rose by 34.8%. The main reason for this inflation is still that in order to meet the growth requirements of social fixed assets investment and solve the problem of enterprise capital shortage, the government has increased its fiscal expenditure since 1986 and continuously expanded its fiscal deficit. Especially after the implementation of 1988 "one household" financial system, the social demand has further soared. At the same time, in order to solve the government deficit problem, money is issued year after year. By the fourth quarter of 1988, the currency in circulation in the market was 2134 billion yuan, a year-on-year increase of 46.7%. Due to the over-issuance of money, the circulation of money in the market has increased sharply, which has triggered a violent rise in prices and currency depreciation. In May of the same year, the government announced that the price subsidy would be changed from implicit subsidy to explicit subsidy [2]. In June, the government repeatedly expressed its determination to overcome the obstacles of price reform. In July, the government tried to open the price of brand-name tobacco and alcohol. This series of measures aggravated residents' uncertain psychological expectations, which triggered the snap-up of 1988 in mid-August and the bank deposit run. 1988 at the end of the fourth quarter, the total retail sales increased by 20.3% year-on-year. Bank deposits decreased by 2.6 billion yuan in August, and the official inflation rate reached 18.5%. In order to rectify the serious inflation, the central government has implemented a comprehensive "overload rectification" of the economy, and its measures are the most severe since the reform and opening up.
2.1987 ~1991Choice of intermediate target of monetary policy: credit scale+money supply+interest rate adjustment.
Slightly different from the intermediate goal of monetary policy from 1984 to 1986, in the fourth quarter of 1988, the banking system launched an index plan linking deposit income with inflation rate, that is, "time deposit preservation measures", which quickly stopped the bank run. In the third quarter of 1988, We still use the data in Table 2 for specific analysis:
1987~ 199 1 year growth rate of China's money supply.
age
1987
1988
1989
1990
199 1
M0
M 1
The second part of money supply
19.4
20.4
24.2
46.7
2 1.6
2 1.0
9.8
5.7
18.3
12.8
19.7
28.0
20.2
23.6
26.5
1988 total loans increased by 28.6%, and M0 circulation was 67.95 billion yuan, up by 46.7% over the previous year. The money supply of 1988 is mainly the result of sudden lending by commercial banks at the end of last year. In order to cope with inflation, the central bank began to implement "rectification" measures focusing on austerity from the fourth quarter of 1988. 1989, the total loans decreased by 3.5%, the money supply decreased by 47 billion yuan compared with the previous year, and the growth rate of money supply decreased to 9.8%. Although the implementation of this monetary policy has played a very good role in curbing inflation, the excessively strict monetary policy has directly led to the economic growth in the downturn of 1989 and 1990.
3.1987 ~1991year monetary policy tool selection: loan scale mandatory plan.
The specific monetary policy is: 1987 to1August 1988, and the monetary policy of "controlling the total amount and adjusting the structure" is implemented; During the period of economic contraction from September 65438 to September 65438 to September 0990, monetary policy was tightened first and then relaxed. 199 1 year, the economy returned to a high-speed growth path with low inflation, and monetary policy achieved the expected results. 1987~ 1988: the government has improved the credit management system of the central bank, adopted the method of controlling the credit scale, and required all specialized banks to carry out enterprise reform and balance their own funds; Strengthen the seasonal control of loans by the central bank, and concentrate the control right of loans in the head office of China People's Bank; 1In August, 987, the People's Bank of China put forward the control target of the total amount of loans and currency issuance with the characteristics of austerity, realizing that inflation began to rise due to currency instability; From 65438 to 0988, the monetary policy of "controlling aggregate and adjusting structure" was further established. On the premise of limiting the scale of monetary credit, we should adjust the credit structure and correctly guide the flow of funds. From September 65438 to September 0988, we began to tighten monetary policy: strengthen the planned management of monetary credit and establish a credit monitoring system for the whole society; The method of "quota management" is adopted for credit, and the credit scale is determined according to the proportion of deposits; The method of "bright bottom all year round, quarterly control and moderate adjustment" is adopted to ensure that the loan is used for productive construction; Strengthen the adjustment of credit structure, ensure key production and reduce general loans; Raise the loan interest rate and reduce inflationary pressure. From September 1989: increase the amount of base money and the scale of bank credit; Reduce interest rates and implement preferential interest rates for key national projects; Relax the loan scale restrictions and solve the problem of insufficient funds. By the end of 199 1, the triangular debts accumulated by loss-making state-owned enterprises reached 200 billion yuan, and the government invested 35 billion yuan in state-owned departments, directly issuing "venture loans" and "stability and unity loans" to large and medium-sized state-owned enterprises to ensure their normal operation. We can see that the adjustment of monetary policy is drastic and unsustainable, which has a certain impact on the operation of the economy.
Iii. Analysis of Monetary Policy 1992~ 1997
1.1992 ~1997 the choice of the ultimate goal of monetary policy: anti-inflation+balance of payments.
China's economy experienced a low inflation period of 1990~ 1992, and China's economy became active after Deng Xiaoping's southern tour 1992. By the first half of 1993, inflationary pressure began to rise again, and the financial industry was in chaos. In the domestic financial market, a large amount of funds are concentrated in the real estate market in coastal areas. In order to realize their different interests, banks, financial institutions and local governments evaded the regulations and supervision of the central bank and raised a large amount of funds for the real estate industry, resulting in excessive money supply and credit scale exceeding the plan repeatedly. The central government began to implement a tight monetary policy in the summer of 1993, and Premier Zhu Rongji personally served as the governor of the People's Bank of China. The main measures taken include: strengthening financial discipline; Separate state-owned banks from their subordinate trust and investment companies; All specialized banks must immediately cancel unplanned loans; Restrict cross-regional loans; Send working groups to the provinces to check the implementation and so on. At the same time, in the foreign exchange market, the RMB depreciated sharply, and the exchange rate of RMB against the US dollar suddenly dropped from 1:5.64 to 1:8.27, and the balance of payments deteriorated. Due to the huge pressure of domestic demand and the soaring investment demand, the fiscal deficit and the extraordinary growth of money supply have led to an all-round outbreak of inflation. At that time, the economy was overheated, and the main goal of monetary policy was to curb the increasingly serious inflation and balance of payments.
2. 1992~ 1997 choice of intermediate target of monetary policy: credit scale+money supply.
The excessive money supply of 1988 was the result of sudden lending by commercial banks at the end of last year, while 1992 and 1993 were the result of the speculative upsurge in real estate and stocks at that time, when commercial banks borrowed a lot and credit was out of control. We analyze through Table 3:
1992~ 1997 China money supply growth rate
age
1992
1993
1994
1995
1996
1997
M0
M 1
The second part of money supply
36.4
38.2
3 1.3
35.3
2 1.6
24.0
24.3
7.3
49.0
8.2
22.4
29.4
1 1.6
18.9
25.3
15.6
22. 1
19.6
In the stage of economic contraction, tight monetary policy is embodied as the intermediate goal of reducing the scale of loans and reducing the growth rate of money supply. From 1992 to 1993, due to the serious economic bubble in China (such as the merger of Hainan Development Bank), high inflation rate and great potential financial risks, the central government began to implement a "soft landing" in the summer of 1993, and introduced 13 measures in monetary policy to reduce the scale of bank credit. M0 The newly-increased money supply decreased from1528.7 billion in 1993 to1423.9 billion in 1994 and 59.68 billion in 1995. Because this regulation has learned the lesson that excessive monetary tightening led to economic supercooling in the past, the implementation of this monetary policy has always followed the principle of "moderate tightening", and finally successfully achieved a "soft landing" of the economy at 1996. But in fact, it has brought some negative effects: the tightening of credit situation has destroyed the balance of comprehensive credit to some extent; Restricting inter-regional credit greatly reduces the circulation speed of money; Austerity measures do great harm to non-state-owned enterprises, but have little influence on state-owned enterprises; There is a huge difference between the official interest rate and the market interest rate. 1in the summer of 1993, the loan interest rate of coastal specialized banks was 10%~ 16%, while the market interest rate reached 20%~35%. three
3. 1992 to 1997 Choice of monetary policy tools: loan scale mandatory plan+money supply.
There are a lot of irregularities in the interbank lending market in China. Although the rectification 1993 began in July, the lending momentum continued unabated. 1On August 5, 1993, the central bank ordered specialized banks to check interbank lending to non-financial institutions in order to recover illegal loans; Separate policy loans from commercial loans of specialized banks. 1994: strictly control the growth rate of money supply; Continue to limit the scale of loans; Stop issuing government deficit financing credit; The central bank uses swap transactions to "hedge" the increase in the amount of base money caused by foreign exchange holdings; Give play to the role of interest rate leverage; Monetary policy tools to improve the operation of market economy. 1995: control the growth of cash and credit scale; Raise the loan interest rate of financial institutions and commercial banks; Implement value-preserving savings; Promotion of commercial paper; It is forbidden for local governments to exert policy loan pressure on banks. 1996: China officially defines the money supply as the intermediate target of monetary policy, and the central bank can indirectly control the narrow and broad money quantities by increasing the control of the base money quantity; Use local and foreign currencies for hedging operations; Change the way of administrative intervention, pay attention to the use of credit scale management to achieve the development of national key industries and regional development goals; Establish a nationwide interbank lending market in Shanghai, improve the government bond repurchase market and commercial paper market, and promote the marketization of bank interest rates. During the period of 1997, the focus of monetary policy mainly focused on deepening financial reform, rectifying financial order and preventing and resolving financial risks.
Four. abstract
Since 1984, the central bank's monetary policy has had both successes and failures. Due to the underdevelopment and imperfection of China's financial market, specifically, it is in line with China's national conditions that the monetary policy chooses the loan scale during the period of 1984~ 1997, with M0 as the main money supply as the intermediary target. They are not only simple and easy to measure, but also have strong direct operability. Because the effect of China's central bank's use of economic leverage to regulate the economy is not obvious, on the contrary, the central bank's use of old credit control means (mainly administrative orders) is often very effective. It is very effective for China's monetary policy to take the indicators with strong direct manipulation as the intermediate goal of monetary policy, and it also reflects how fragile the market is after so many years of reform in China. It must also be pointed out that due to the institutional division of microeconomic entities and the institutional restrictions of banks, the monetary policy in the period of 1.984 ~ 1.997 showed the characteristics of violent swing between the excessive money supply and the tight money supply, which also led to the economic operation of our country often falling into the cycle of "getting hot as soon as it is released"-"getting hot as soon as it is released".