OSIAS COLLEGES, INCORPORATED

COLLEGE DEPARTMENT
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Monetary Policy and Central Banking

S.Y 2023-2024
Final Output

CHINA

Submitted by:

Myke Ckelvin D. Agustin

Submitted to:

Camille R. Cristobal, MBA

Instructor
 I. INTRODUCTION ABOUT CHINA (PBC/PBOC)

The People's Bank of China (officially PBC and unofficially PBOC) is the central bank of the
People's Republic of China. It is responsible for carrying out monetary policy as determined
by the People's Bank Law and the Commercial Bank Law. The monetary policy of China
aims to keep the value of the Renminbi, the official currency of the People's Republic of
China, stable and contribute to economic growth. Monetary policy concerns the actions of a
central bank or other regulatory authorities adopt to manage and regulate currency and credit
in order to achieve certain macroeconomic goals.

The People's Bank of China－the country's central bank－will introduce a monetary policy to
steady the economy. The prudent monetary policy will be flexible and appropriate. Cross-
cyclical regulation will be strengthened in a more proactive and progressive manner. The
monetary policy will be carried out in a way that ensures stable and well-structured money
supply, and guides financial institutions to scale up support for small and micro businesses,
technological innovation and green development, so as to keep economic fundamentals stable
and create an enabling monetary and financial environment for high-quality economic
growth.

There are several keywords that help one understand what makes a prudent monetary policy
work in a flexible and appropriate manner.

The first is stability. As the economy faces downward pressure, keeping growth stable is
nothing short of major progress. In an effort to increase support for the real economy, stable
money supply must be ensured with adequate aggregates and reasonable rates. The monetary
policy must be targeted and proactive to help improve economic structure, and be front-
loaded and forward-looking to stay ahead of the market curve.

The second is flexibility. The pace, intensity and focus of monetary policy will be flexibly
adjusted in light of changing circumstances to facilitate high-quality development. Targeted
support will be especially increased for small and micro businesses, green development and
technological innovation. Efforts will be made to improve credit structure while stabilizing
the total amount of lending.

The third is appropriate amount and price of lending. Efforts will be made to ensure
steady credit growth, and keep growth of broad money supply and aggregate social financing
basically in line with nominal economic growth in order to bring down financing costs for
businesses.

No longer the most populous, but still China wants to be world number one

Last week, the UN’s global population project announced a major shift in the way the world
looks. Next year, India, not China, will be the world’s most populous country. Right now,
China has 1.43 billion people to India’s 1.41 billion, but by mid-century there will be more
than 1.6 billion Indians to around 1.3 billion Chinese.

At one level, this development ought to delight Beijing, which compelled its population into a
“one child” policy for some 40 years. Yet there may be a few disconsolate faces in Beijing.
The idea of China being the most populous society in the world has long been linked to the
country’s rise. Officially, China dismisses any idea that being at the top of global rankings
matters: in January this year, vice foreign minister Le Yucheng declared that China had no
interest in becoming the world’s biggest economy or superpower and would instead work on
improving its people’s lives at home.

Yet for years, Chinese social media has overflowed with confrontational voices demanding
that the country should be “No 1”. The drop to No 2 in global population is likely to bring
soul-searching about that quest for the other global top spot. Despite those denials from its
leaders, there’s no doubt that China is aiming to become the world’s largest economy, and by
some measures such as purchasing power parity, it already is. In terms of nominal GDP, it’s
still No 2 to the US, but many economists suggest that it’s likely to reach the top by the late
2020s (although unexpected factors such as the economic effects of Covid quarantines could
get in the way).

The quest to grow GDP is part of a wider project to head the rankings in a range of areas.
During the 1980s and 90s, Chinese policymakers responded to challenges from the
paramount leader, Deng Xiaoping, to construct a model that tracked a concept they termed
“comprehensive national power” (zonghe guoli). Much of the assessment started within the
military, with assessments of weaponry and training, but attention quickly turned to economic
factors. Deng’s analysts ranked its existing resources such as its labour force and material and
mineral resources, as well as projecting future capacity in areas such as new technologies.
 II. PRICE STABILITY

BEIJING — China is capable of keeping overall prices in a reasonable range despite soaring
inflationary pressures worldwide and fluctuations in food prices in the near term, officials and
analysts said.

China's consumer price index (CPI), a main gauge of inflation, rose 2.7 percent year-on-year
in July. The producer price index (PPI), which measures costs for goods at the factory gate,
went up 4.2 percent year-on-year.

"In the next stage, upward pressures on consumers exist, but China still has multiple
conditions favorable to the overall price stability," said Fu Linghui, an official with the
National Bureau of Statistics (NBS).

Hyping The Narrative that "China is experiencing deflation"by Western Countries

Deflation is undesirable, and China has set a target of 3 percent for controlling the inflation
rate this year. The year-on-year GDP growth rate in the first quarter stood at 5.3 percent. The
contribution of external demand was 14.5 percent. This indicates that global demand is
increasing, with the world merchandise trade volume is expected to grow 2.6 percent this
year.

The central financial and economic-related meetings and this year's two sessions have clearly
stated the target for the CPI. With the continued growth of the Chinese economy in the
second, third, and fourth quarters of this year, restoring confidence and expectations, the
"China falling into deflation" narrative will be self-defeating.

According to data released by the National Bureau of Statistics, the year-on-year CPI in the
first quarter remained stable. Some institutions have predicted a lower CPI growth rate for
China in 2024, but this forecast is made without considering the comprehensive policies that
China will implement this year to address obstacles and issues facing high-quality
development, and to achieve a balance between short, medium and long-term goals.

Looking at the overall trend of CPI for the year, insufficient demand remains the main issue
in the current Chinese economy. If the country introduces corresponding measures to address
issues such as insufficient demand, this year's CPI growth rate will certainly be higher than
the external predictions.
 III. FINANCIAL STABILITY

FINANCIAL STABILITY LAW?

The bill is China's first comprehensive piece of legislation specifically focused on the
prevention, resolution, and disposal of risk in the country's $66 trillion financial sector, which
includes banks, insurers, asset managers and securities firms.
China has previously enacted industry-specific bills for commercial banks, securities and
insurance, but this new law fills a crucial gap in the regulatory framework, according to a
note by Chinese law firm JunHe.

The law provides "a top-level design for systemic financial risk prevention and cross-
agencies supervision", addressing the need for better coordination among different financial
regulators and market participants to prevent systemic financial risks.

WHAT IS THE FINANCIAL STABILITY FUND AND HOW IS IT FUNDED?

A key priority of the law is the establishment of a financial stability guarantee fund. The fund
is designed as a backup funding source to rescue troubled financial institutions to prevent
contagion risks. The fund would primarily raise money from financial institutions, according
to the bill.

China's central bank can also provide cheap loans through the relending facility, it said,
adding the loans should be repaid by income from the disposal of risky institutions.

The fund would cover systemically important financial firms that are "too big to fail", such as
major banks and insurers, as well as institutions that are identified as having high risks, the
analysts said.
To mitigate moral hazard, the bill stipulates that troubled financial firms and their major
shareholders are required to rescue themselves first and to take all necessary steps to clean up
debt and recover losses before seeking external help.

IV. EFFICIENT AND RELIABLE PAYMENT AND SETTLEMENT

SYSTEM
PAYMENT & SETTLEMENT SYSTEM OF PBC
PBC has developed several interbank payment systems, which include the High-Value
Payment System (HVPS), the Bulk Electronic Payment System (BEPS), the Internet
Banking Payment System (IBPS) and the China Domestic Foreign Currency Payment System
(CDFCPS).

High-Value Payment System (HVPS)

HVPS mainly handles inter-city and local credit transfers above a given value as well as
urgent low-value transfers electronically. Payment instructions are sent in real time and
cleared transaction by transaction.

Bulk Electronic Payment System (BEPS)

BEPS deals mainly with local and non-local paper-based debit payments as well as low-value
credit transfers below a given value. In June 2006, BEPS was put into operation nationwide.
The system sends payment instructions in bulk, nets in real time and settles at regular times.

Internet Banking Payment System (IBPS)

IBPS mainly handles interbank retail payment transactions via the internet, enabling
customers to submit online payments and obtain results in real time. IBPS has been put into
operation nationwide since August 2010.

China Domestic Foreign Currency Payment System (CDFCPS)

CDFCPS is an RTGS system developed by PBC for the foreign currency payments incurred
by domestic purchases of goods and services. It was put into operation at the end of April
2008. CDFCPS can process payments in eight currencies: USD, HKD, GBP, EUR, JPY,
CAD, CHF and AUD. It does not involve foreign exchange transactions.

V. FOREIGN EXCHANGE

WHAT IS CHINA’S STATE ADMINISTRATION OF FOREIGN EXCHANGE

(SAFE)?
The term China's State Administration of Foreign Exchange (SAFE) refers to a national
regulatory agency that oversees activities in China's foreign exchange market. The agency
was founded in 1979 and is based in Beijing. SAFE functions as an official state-run bureau
under the People's Republic of China and is part of the country's central bank. As of
December 2020, it held approximately USD $3.22 trillion in foreign currency reserves. The
agency is administered at the state level and is made up of seven departments, which oversee
its primary functions.
These main responsibilities include:
 Drafting policies and regulations related to foreign reserves and foreign exchanges
 Supervising and inspecting forex transactions
 Managing China's forex, money reserves, and foreign currency assets

VI. INTEREST RATES/KEY POLICY RATES

PBC LOAN PRIME RATE

When reference is made to the Chinese interest rate this often refers to the Loan Prime Rate.
The Loan Prime Rate - also called the central bank base interest rate or base rate - is PBC's
basic interest rate. By changing the Loan Prime Rate, the chinese central bank has a lot of
influence over the rates which need to be paid in the market for loans and mortgages and the
interest paid on savings. By changing the Loan Prime Rate, the chinese central bank can also
influence the exchange rates of the Chinese Renminbi.

The PBOC also made adjustments to its

lending programme, saying collateral
requirements for medium-term lending
facility loans will be lowered from July

The People’s Bank of China Raised

Interest Rates of RMB Loans
The People’s Bank of China took a decision
to raise the benchmark lending rates of the
financial institutions, effective on 28th Apr.
The benchmark interest rate of loans with a
maturity of one-year of the financial
institutions was raised by 0.27 percentage
points from the current level of 5.58 percent to 5.85 percent,and interest rates of loans with
other maturities were adjusted accordingly.Deposit rates of the financial institutions remain
unchanged.