China’s monetary policy

With all the focus on LIBOR and imploding Europe, investors have almost “forgotten” about China. How is the Chinese monetary policy run and much more, courtesy Also Sprach Analyst.

Just how different China’s monetary policy is run compared to the West? Perhaps not much. They cut and raise interest rates just as everyone else does.

Or not.

China is not different from the rest of the world in a sense that Newton’s three laws of motion and law of universal gravitation work in China just as everywhere else and basic principles of economics hold in China just as in everywhere else. Chinese central bank, just as every other central bank around the world, would like to see better growth in credit when they want to stimulate growth, and tighten monetary policy when they need to fight inflation. In that sense, they are the same. The difference is just how monetary policy is run.

Policy tools

1. Interest rates

Just like other central banks, the People’s Bank of China (PBOC) changes target interest rates. But unlike most central banks in the developed world, which tend to control only the short-end of the curve (like the Federal funds rate), the PBOC control all rates across maturities and type of rates, i.e. both lending and deposit rates.

The absolute control on all rates have been relaxed somewhat in recent years, and particularly in the recent months, where banks are free to set lending and deposit rates with wider deviations from the benchmark rates.

Full article here.