What type of monetary policy does the PBOC follow?

China’s central bank has often been maligned for using non-traditional means of monetary policy. Some of these have been extremely invasive, not only for the Chinese economy, but for economies outside China. It is well known that China has interfered in normal free-market operations in the past, by manipulating currency values for example. Ultimately the PBOC has a mandate to grow the Chinese economy and to maintain stability for the renminbi. And they will do whatever they deem necessary in pursuit of that objective. Fortunately, China has become more sensitive to other country’s needs in the modern age, and that’s led the PBOC to pursue a more normal monetary policy course.

How does the PBOC control China’s money supply?

Because China is such a strong export economy that generates a significant amount of foreign currency it has traditionally remained very active in manipulating the value of its own currency. Because the dollars, yen, euro, and pounds generated overseas have to be converted to China’s yuan when repatriated the Chinese currency had a tendency to strengthen steadily. That is bad for China’s export economy since a stronger yuan makes China’s exports less competitive overseas. Two ways China manages its money supply is by controlling forex rates and printing currency. The PBOC can also control the money supply by changing the reserve ratio and the discount rate.

How does the PBOC manipulate forex rates?

When Chinese exporters repatriate other currencies, they take them to the PBOC to convert to yuan. Converting these immense amounts of foreign currencies entering China is one of the tasks designated to the PBOC. Because it is a central bank, the PBOC is free to print any amount of yuan needed to exchange for forex markets. Because the PBOC can print as much local currency as they please they have been able to keep the yuan exchange rate in a tight range over the past decade, ensuring that Chinese exports remain cheaper, and that China maintains its position as the top manufacturing and exporting economy.

People's Bank of China in Fundamental Analysis

The People’s Bank of China (PBOC) is the central bank of the People’s Republic of China. Like other central banks, the PBOC has the dual mandate of fostering financial stability and enhancing economic prosperity in China. The bank has undergone a series of reforms and now enjoys a great deal of autonomy by Chinese standards. Still, it remains one of the 25 cabinet-level state departments that constitute the State Council. Nonetheless, the PBOC is one of the most powerful central banks in the world, and it boasts the largest Forex reserves that tops $3 trillion. Furthermore, the PBOC is known to implement unconventional monetary policy tools that have provided localised solutions for economic prosperity in the Republic of China.

History of the People’s Bank of China

The PBOC was founded on December 1st, 1948 following the merger of 3 major banks: Huabei Bank, Beihai Bank and Xibei Farmer Bank. This happened after the Chinese Communist Party took the reins of power, and the People’s Republic of China was created. The PBOC served as the only bank in the country until 1978, providing both central banking and commercial banking services during China’s famed planned economy period.

During that period, all other banks acted as non-deposit taking subsidiaries of the PBOC. Economic reforms performed by the Chinese State Council in 1978 resulted in the PBOC being split into 4 separate, but state-owned banks. In 1982, the State Council announced that the PBOC would serve as China’s central bank. It was not until 1995 that PBOC’s status as the country’s central bank was anchored in law. Major reforms continued before the turn of the millennium, and in 2003, PBOC achieved greater autonomy and assumed overall responsibility for financial stability and economic prosperity for the People’s Republic of China.

PBOC Governance

The PBOC is headquartered in Beijing, and multiple offices throughout China are not subject to local administrative jurisdictions. The bank is headed by a Governor and 5 deputies. The Governor assumes overall responsibility for the operations of the PBOC, with the deputies expected to provide assistance.

Functions and Roles of the PBOC

The PBOC has over 18 departments that work to perform a wide scope of roles and functions that include:

Draft and implement monetary and macro-credit guidance policies.
Spearhead financial sector reform and the development of strategic plans for the financial sector.
Draft, improve and implement relevant laws and regulations that help in performing its central banking functions.
Issue and manage the circulation of the Chinese currency, Renminbi (RMB).
Organise and formulate plans for the modernisation and digitisation of the Chinese financial sector.
Gather relevant data for macro-economic analysis and forecasting, as well as disseminate to the public all useful information.
Assume responsibility as the lender of last resort for financial institutions when such liquidity resolves any major financial risk.
Supervise and manage the interbank lending market as well as all derivative transactions in all financial markets.
Develop and implement the Yuan exchange rate; as well as monitor and track cross-border capital flows.
Hold, manage and operate the state’s Forex and Gold reserves.
Manage the credit sector while taking full responsibility for maintaining a functioning social credit system.
Ensure a functioning national payments system.
Represent the People’s Republic of China in international financial activities in the capacity of a central bank.

PBOC Unconventional Monetary Policy Tools

Most central banks utilise conventional monetary policy tools, such as open market operation and changing interest rates, to manage or stimulate their underlying economies. But the PBOC has often implemented unconventional, but targeted monetary policy tools that have helped it achieve its objectives. They include:

Required Reserve Ratio (RRR)

The PBOC has routinely applied targeted RRR cuts for banks and financial institutions that lend to specific groups of the economy, such as SMEs (small and medium-sized enterprises) and Agriculture.

Pledged Supplementary Lending (PSL)

The PSL is a lending facility that allows the PBOC to lend to banks at favourable, flexible rates. The banks can then lend to targeted institutions or fund projects of state interest.

Loan to Deposit Ratio (LDR)

The PBOC redefined its LDR calculation, omitting determinants such as loans financed by the central bank. This automatically increases funds available for banks’ loan books.

PBOC in Fundamental Analysis

China is a major player in the global financial markets, which makes the PBOC particularly influential. To start with, the PBOC holds over $3 trillion in Forex reserves, the largest holding in the world. Whenever the PBOC announces an increase or decrease in those reserves, the pricing of underlying assets is impacted. For instance, if the PBOC decides to liquidate US treasuries, the value of those treasuries, as well as that of the US dollar, will usually drop.

The PBOC is also an aggressive market intervener and usually implements big cuts or hikes when the Chinese economy needs stimulation or cooling. Previously, the PBOC based their rate system on Abacus, which meant that rates were set on numbers divisible by 9 (such as 0.27%). But this was ditched for the standard system where rates are divisible by 25 (such as 0.50%). Chinese rate hikes or cuts do not affect just the Renminbi value. In Forex trading, they massively impact on the AUD (Australian dollar), which is one of the major currencies. This is because Australia and China have deep trade ties. As such, a PBOC rate hike will likely be bullish for the AUD, whereas a rate cut will be bearish for the AUD.

Bank of China main FAQs

What type of monetary policy does the PBOC follow?
China’s central bank has often been maligned for using non-traditional means of monetary policy. Some of these have been extremely invasive, not only for the Chinese economy, but for economies outside China. It is well known that China has interfered in normal free-market operations in the past, by manipulating currency values for example. Ultimately the PBOC has a mandate to grow the Chinese economy and to maintain stability for the renminbi. And they will do whatever they deem necessary in pursuit of that objective. Fortunately, China has become more sensitive to other country’s needs in the modern age, and that’s led the PBOC to pursue a more normal monetary policy course
How does the PBOC control China’s money supply?
Because China is such a strong export economy that generates a significant amount of foreign currency it has traditionally remained very active in manipulating the value of its own currency. Because the dollars, yen, euro, and pounds generated overseas have to be converted to China’s yuan when repatriated the Chinese currency had a tendency to strengthen steadily. That is bad for China’s export economy since a stronger yuan makes China’s exports less competitive overseas. Two ways China manages its money supply is by controlling forex rates and printing currency. The PBOC can also control the money supply by changing the reserve ratio and the discount rate.
How does the PBOC manipulate forex rates?
When Chinese exporters repatriate other currencies, they take them to the PBOC to convert to yuan. Converting these immense amounts of foreign currencies entering China is one of the tasks designated to the PBOC. Because it is a central bank, the PBOC is free to print any amount of yuan needed to exchange for forex markets. Because the PBOC can print as much local currency as they please they have been able to keep the yuan exchange rate in a tight range over the past decade, ensuring that Chinese exports remain cheaper, and that China maintains its position as the top manufacturing and exporting economy.