What Prompts the People's Bank of China to Change Its Monetary Policy Stance?Evidence from a Discrete Choice Model

In the present paper, we model the policy stance of the People＇s Bank of China （PBC） as a latent variable, and the discrete changes in the reserve requirement ratio, policy interest rates, and the scale of open market operations are taken as signals of movement of this latent variable. We run a discrete choice regression that relates these observed indicators of policy stance to major trends of macroeconomic and financial developments, which are represented by common factors extracted from a large number of variables. The predicted value of the estimated model can then be interpreted as the implicit policy stance of the PBC. In a second step, we estimate how much of the variation in the PBC＇ s implicit stance can be explained by measures of its policy objectives on inflation, growth and financial stability. We find that deviations of CPI inflation from an implicit target and deviations of broad money growth from the announced targets, but not output gaps, figure significantly in the PBC＇s policy changes.

Liquidity of China’s government bond market: Measures and driving forces

We construct a daily liquidity index of China’s government bond market using transaction data from the national interbank market during 2001–2020.The index is a composite of popular price-based and quantity-based metrics of liquidity.The composite indices,ob-tained by averaging across different metrics and by applying the principal component analysis,respectively,both point to a better liquidity condition after 2010.Market liquidity swings appear to be highly correlated with domestic funding liquidity and financial mar-ket volatility,but display fewer correlations with global macrofinan-cial indicators.Our findings suggest that the further deepening of the government bond market would support domestic financial stability and monetary operations down the road.

How would Capital Account Liberalization Affect China's Capital Flows and the Renminbi Real Exchange Rates?

In this paper we study the determinants of gross capital flows, project the size of China＇s international investment position in 2020, and analyze the implications for the renminbi real exchange rate if China liberalizes the capital account. We assume in this exercise that the renminbi will have largely achieved capital account convertibility by the end of the current decade, a timetable consistent with recent proposals by the People ＇s Bank of China. Our analysis shows that if the capital account were liberalized, China＇s gross international investment position would grow significantly, and inflows and outflows would become much more balanced. The private sector would turn its net liability position into a balanced position, and the official sector would reduce its net asset position significantly, relative to the country ＇s GDP. Because of the increasing importance of private sector foreign claims and the decreasing importance of official foreign reserves, China would be able to earn higher net investment income from abroad. Overall, China would continue to be a net creditor, with the net foreign asset position as a share of GDP remaining largely stable through this decade. These findings suggest that the renminbi real exchange rate would not be particularly sensitive to capital account liberalization as capital flows are expected to be two-sided. The renminb i real exchange rate would likely be on a path of moderate appreciation as China is expected to maintain a sizeable growth differential with its trading partners.

Renminbi Derivatives: Recent Development and Issues

This study reviews the developments in markets. The onshore market has seen a the onshore and offshore renminbi derivatives rapid build-up in the market infrastructure and price discovery mechanism in the past year, with empirical evidence suggesting that its pricing is increasingly determined by financial fundamentals, such as the covered interest rate parity. However, the growth of the market has been restrained by restrictions on the participant base, limited variations in the RMB/US$ exchange rate, market participants＇ lack of technical capacity and experience, and inadequate supporting financial market infrastructure. The non-deliverable forward （NDF） market, concentrated in Hong Kong and Singapore, is more developed, but has the drawback that its pricing is not tied to financial fundamentals. The comparison between onshore and offshore markets suggests that two issues are of particular importance for future derivatives market development in China： the balance between regulation and development, and the relationship between onshore and offshore markets.

Exchange Rate Pass-through in China

During the second half of 2007 and early part of 2008 when there were intense inflationary pressures in China, RMB appreciation was advocated as a means of helping to curb inflation. The effectiveness of appreciation in controlling inflation depends on the impact of exchange rate movements on import and domestic prices. Our analysis finds fairly large and speedy exchange rate pass-through （ERPT） to import prices： 50 and 60percent for the short run and long run, respectively. However, the degree of ERPT decreases along the price chain from upstream to downstream prices. ERPT for consumer prices, the most downstream prices, is much milder and has substantial lags. A 10-percent rise in the nominal effective exchange rate will dampen consumer prices by 1.1 percent within a year, with very little pass-through in the first half year, and by 2.0percent over the long run. These findings, particularly the ERPT to consumer prices, suggest that RMB appreciation can help to reduce inflationary pressures over the longer term. However, it is unlikely to provide rapid relief to the current round of high inflation because of the long lags in ERPZ. The RMB needs to strengthen in effective terms to exert the desired dampening impact on prices.

Has China Crowded out Foreign Direct Investment from Its Developing East Asian Neighbors?

This paper applies a gravity model to investigate the determinants of foreign direct investment （FDI） in East Asia. Economic fundamentals, such as market size, per capita income and country risk indicators, economic and cultural ties, exchange rate volatilities and information asymmetry are found to be important determinants for FDL Globally, the inward FDI among high-income OECD economies declined significantly on average over the period of 1990-2003, whereas the inward FDI of the high-income OECD economies in emerging market economies gained substantially. In the East Asian region, the ASEAN-4 （Indonesia, Malaysia, the Philippines and Thailand） received above-average inward FDI from the high-income OECD economies after controlling for their economic fundamentals. By contrast, China＇s FDl from the high-income OECD economies is below average relative to its economic fundamentals. Therefore, it is difficult to establish that China has crowded out FDI from its developing ASEAN neighbors.