2016/9/20 Media News Chinese financial markets Sept 15, 2016: Bank of England leaves interest rates unchanged Part 1: Central Bank and pboc MPC holds Bank Rate at 0.25 ins government bond purchases at d see if the economy can continue to weather the initial shock of the Brex By Zhang Xiaorong 025%E10 Fudan University, Shanghai, China Media News Monetary Authority July 27, 2016: Fed Keeps Rates Unchanged Monetary authority" is a generic term in finance and economics for the entity which controls the supply of of 0. 25% to 0.50%)but risks to the u.s. economic outlook had diminisher ther parameters which control the cost and availability of Generally, a monetary authority is a central bank: the Federa ng in June. It added that househo Reserve: People s Bank of China; Bank of Japan Other arrangements: ECB; HK Monetary Authority; Free king where a broad range of entities can issue notes ss worry about possible shocks that could push the U.S. economy off Monetary Authority Monetary Policy at determine the size and rate of owth of the money supply, which in turn affects interest creasing the supply of money to stimulate the economy when it,s in recession 1
2016/9/20 1 Chinese Financial Markets Part 1: Central Bank and PBoC Sept.‐Dec.2016 By Zhang Xiaorong Fudan University, Shanghai, China 1-1 Media News • Sept.15, 2016: Bank of England leaves interest rates unchanged – All nine MPC members took the wait‐and‐see approach by voting to stick with the measures announced in August – MPC holds Bank Rate at 0.25% maintains government bond purchases at £435bn and corporate bond purchases at £10bn – The Bank of England left the door open to another interest rate cut this year but decided that the safest option for now was to wait and see if the economy can continue to weather the initial shock of the Brexit vote. 1‐2 Media News • July 27, 2016: Fed Keeps Rates Unchanged – The Federal Reserve left interest rates unchanged on Wednesday (left its benchmark overnight interest rate in a range of 0.25% to 0.50%) but said near‐term risks to the U.S. economic outlook had diminished, opening the door to a resumption of monetary policy tightening this year – The U.S. central bank said the economy had expanded at a moderate rate and job gains were strong in June. It added that household spending also had been "growing strongly," and pointed to an increase in labor utilization. – While Fed policymakers said they continued to closely monitor inflation data and global economic and financial developments, they indicated less worry about possible shocks that could push the U.S. economy off course. 1‐3 Monetary Authority • “Monetary authority” is a generic term in finance and economics for the entity which controls the money supply of a given currency, and has the right to set interest rates, and other parameters which control the cost and availability of money. • Generally, a monetary authority is a central bank: the Federal Reserve; People’s Bank of China; Bank of Japan • Other arrangements: ECB; HK Monetary Authority; Free banking where a broad range of entities can issue notes or coin. 1‐4 Monetary Authority 1‐5 Monetary Policy • The actions of a central bank, currency board or other regulatory committee that determine the size and rate of growth of the money supply, which in turn affects interest rates and economic activities. • Monetary easing means reducing the cost of money or increasing the supply of money to stimulate the economy when it’s in recession; • monetary tightening means the contrary conductions when the economy is overheating. 1‐6
2016/9/20 Central Bank Intermediation Central Bank Intermediation (Monetary Policy) BALANCE SHEET Instruments of Monetary policy Reserve Requirements In general, central banks adjusts the money supply equired reserve The amount of money that banks are required to that commercial banks can lend to the business keep on deposit at the central bank for the Usually measured in the percentage of a banks total deposit i.e. deposit reserve ratio Open Market Repurchase Agreements aising(or cutting) RRR means the total money that be lent (from the commercial banks )to the business sector is reduced (or enlarged Reserve Requirements Open Market Operations The buying and selling of government securities The amount of cash in hand or deposit in the in the open market in order to expand or contract central bank that is in excess to the required eserve The central bank reduces money supply by selling Deposit reserve rate bonds to primary dealers(security firms and commercial banks)and decreasing the balance The interest rate that the central bank pays on the that banks can lend required reserve and the excess reserve Purchase of government securities injects money into the banking system and stimulates growth
2016/9/20 2 Central Bank Intermediation (Monetary Policy) 1‐7 Central Bank Intermediation (Monetary Policy) 1‐8 Instruments of Monetary Policy • In general, central banks adjusts the money supply by increasing or decreasing the amount of money that commercial banks can lend to the business sector. • Reserve Requirements • Open Market Operations • Open Market Repurchase Agreements • Discount Rate 1‐9 Reserve Requirements • Required reserve – The amount of money that banks are required to keep on deposit at the central bank for the liquidity purpose – Usually measured in the percentage of a bank’s total deposit, i.e., deposit reserve ratio – Raising (or cutting) RRR means the total money that be lent (from the commercial banks) to the business sector is reduced (or enlarged). 1‐10 Reserve Requirements • Excess reserve – The amount of cash in hand or deposit in the central bank that is in excess to the required reserve • Deposit reserve rate – The interest rate that the central bank pays on the required reserve and the excess reserve 1‐11 Open Market Operations • The buying and selling of government securities in the open market in order to expand or contract the amount of money in the banking system. • The central bank reduces money supply by selling bonds to primary dealers (security firms and commercial banks) and decreasing the balance that banks can lend. • Purchase of government securities injects money into the banking system and stimulates growth. 1‐12
2016/9/20 Open Market Operations Open Market Repurchase Agreements Repurchase Agreement(Repo) Reverse Repurchase Agreement An agreement with a commitment by the seller The central bank senis secu rities to dealers and (dealer) of security to buy it back from the agrees to repurchase them at a higher price purchaser at a specified higher price at a designated future date It contracts the short-term liquidity in the banking ector before the central bank buys back the It represents a collateralized short-term loan where the security serves the collateral In the repurchase transaction, the central bank What is the difference between Repo and provides short-term liquidity to the banking open market operation? sector. The wording in China is different. Discount rate Discount Rate he US Fed Discount rate Proceeds from discount loans are also the interest rate charged to commercial bar reserves and increase the banks capacity in other depository institutions on loans they making loans from their regional Federal Reserve Bank facility--the discount window, i. e, the cost of n increase in the discount rate discourages capital financed by the central bank. anks from borrowing from the Fed, thereby Discount windows provides very short-term the total amounts of loans provided to firms. vernight)loan extension, short-term loan a decrease in the discount rate encourages extension and seasonal credit extension to banks to borrow from the fed Monetary Policy Monetary Aggregates Monetary policy aims to controlling the total Intuitively, the more money issued, the more investment activities in the real economy, and the higher the growth and the pressure for How do we calculate the total amount of money in the economy?
2016/9/20 3 Open Market Operations • Repurchase Agreement (Repo) – An agreement with a commitment by the seller (dealer) of security to buy it back from the purchaser at a specified higher price at a designated future date. – It represents a collateralized short‐term loan where the security serves the collateral. – In the repurchase transaction, the central bank provides short‐term liquidity to the banking sector. 1‐13 Open Market Repurchase Agreements • Reverse Repurchase Agreement – The central bank sells securities to dealers and agrees to repurchase them at a higher price – It contracts the short‐term liquidity in the banking sector before the central bank buys back the security. • What is the difference between Repo and open market operation? • The wording in China is different. 1‐14 Discount Rate • The US Fed Discount rate – the interest rate charged to commercial banks and other depository institutions on loans they receive from their regional Federal Reserve Bank's lending facility‐‐the discount window, i.e., the cost of capital financed by the central bank. – Discount windows provides very short‐term (overnight) loan extension, short‐term loan extension and seasonal credit extension to commercial banks. 1‐15 Discount Rate • Proceeds from discount loans are also reserves and increase the bank’s capacity in making loans. • An increase in the discount rate discourages banks from borrowing from the Fed, thereby the total amounts of loans provided to firms. • A decrease in the discount rate encourages banks to borrow from the Fed. 1‐16 Monetary Policy Easing Tightening Required Reserve Ratio Open Market Operation Repo Reverse Repo Discount Rate 1‐17 Monetary Aggregates • Monetary policy aims to controlling the total money in the economy. • Intuitively, the more money issued, the more investment activities in the real economy, and the higher the growth, and the pressure for inflation. • How do we calculate the total amount of money in the economy? 1‐18
2016/9/20 Monetary Aggregates Monetary Aggregates Monetary Base ·Mo base money high-powered money includes cash or assets that could quickly be Defined as the total currency circulating in the public and the total reserve of the M1 (narrow money supply The sum of currency held by the public and transaction deposits(demand deposits )at -The central bank uses monetary policy to depository institutions(commercial banks, savings adjust the amount of reserve of commercial and loan associations, savings banks, and credit banks, i.e., the money supply Monetary Aggregates The US M1 and M2 Stock(in $BIn) M2 comprises M1, savings(including money market deposit accounts), small-denomination time deposits(time deposits, including retail purchase agreements, in amounts of less than 00 000 dollars), and balances in retail money market mutual funds Economists usually use"broad money"to describe M2 is the commonly used measure of broad money ::是 M2 Stock in Major Economies China Monetary Aggregates(M2) (in Trillion Local Currency) and GDP (in tIn RMB 2008 2016 AUG Growth Rate uro zone 7420 ustralia 36.7 182% 语昌自昌到昌司是舞司 Canada echa M2
2016/9/20 4 Monetary Aggregates • Monetary Base – base money, high‐powered money –Defined as the total currency circulating in the public and the total reserve of the banking system – The central bank uses monetary policy to adjust the amount of reserve of commercial banks, i.e., the money supply 1‐19 Monetary Aggregates • M0 – includes cash or assets that could quickly be converted into currency • M1 (narrow money supply) – The sum of currency held by the public and transaction deposits (demand deposits) at depository institutions (commercial banks, savings and loan associations, savings banks, and credit unions) 1‐20 Monetary Aggregates • M2 – M2 comprises M1, savings (including money market deposit accounts), small‐denomination time deposits (time deposits, including retail repurchase agreements, in amounts of less than 100 000 dollars), and balances in retail money market mutual funds. • Economists usually use “broad money” to describe the monetary aggregate • M2 is the commonly used measure of broad money. 1‐21 The US M1 and M2 Stock (in $Bln) 1‐22 0 2000 4000 6000 8000 10000 12000 14000 2000‐01 2000‐07 2001‐01 2001‐07 2002‐01 2002‐07 2003‐01 2003‐07 2004‐01 2004‐07 2005‐01 2005‐07 2006‐01 2006‐07 2007‐01 2007‐07 2008‐01 2008‐07 2009‐01 2009‐07 2010‐01 2010‐07 2011‐01 2011‐07 2012‐01 2012‐07 2013‐01 2013‐07 2014‐01 2014‐07 2015‐01 2015‐07 2016‐01 M1 M2 M2 Stock in Major Economies (in Trillion Local Currency） 2008 2016 AUG Growth Rate China 47.5 151.1 218% US 8.2 13.0 59% Euro Zone 8.1 10.5 30% Japan 742.0 942 27% Australia 1.2 1.9 58% UK 1.8 1.6 ‐11% Russia 13.0 36.7 182% Canada 0.9 1.4 56% 1‐23 China Monetary Aggregates (M2) and GDP (in tln RMB) 1‐24 0 20 40 60 80 100 120 140 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 China GDP China M2
2016/9/20 China M2/GDP Broad Money as %of GDP China 2-1x 119.0 2008 150084320911666129.1 176.69042270170.61360 177584722611687 1312 20111759872238015531314 2012 1824 878241.3153.0 133.3 20131882884247815091344 2014 1930 1399 Source: World Ba Monetary Policy Example Example: the US Fed the us fed and 911 Attack · The Fed' s Mission Official Duties " The Federal Reserve System is the central bank of Conducting national monetary polic the United States. It was founded by Congress in regulation of other banking entities to protect 1913 to provide the nation with a safer, more consumer credit rights flexible, and more stable monetary and financial maintain national financial security system. Over the years, its role in banking and the economy has expanded. The Federal Reserve Website Example: the US Fed Response of the Fed to 9/11 Structure of the Federal Reserve Aim: To increase liquidity and All appointed by the president maintain financial confidence Current chairman -Janet Yellen · How was this achieved? Board of directors 1. Open market operations 2 federal reserve bank 2 committees: Federal Open Market Committee-Monetary 3. Daylight overdraft fees scrapped 4. The establishment of Swap Federal Advisory Council- Advisory Board 5
2016/9/20 5 1‐25 China M2/GDP 0.82 0.89 0.940.990.971.00 1.07 1.15 1.24 1.341.36 1.44 1.54 1.631.591.621.60 1.521.51 1.781.811.80 1.88 1.951.93 2.06 0.80 1.00 1.20 1.40 1.60 1.80 2.00 2.20 Broad Money as % of GDP China USA Japan UK Korea 2005 152.2 71.9 206.6 122.5 111.1 2006 158.8 74.1 204.0 132.1 119.0 2007 150.5 79.2 202.8 145.0 122.1 2008 150.0 84.3 209.1 166.6 129.1 2009 176.6 90.4 227.0 170.6 136.0 2010 177.5 84.7 226.1 168.7 131.2 2011 175.9 87.2 238.0 155.3 131.4 2012 182.4 87.8 241.3 153.0 133.3 2013 188.2 88.4 247.8 150.9 134.4 2014 193.0 89.5 251.2 140.9 139.9 2015 205.7 90.3 251.9 137.8 144.2 Source: World Bank 1‐26 Monetary Policy Example: the US Fed and 911 Attack • The Fed’s Mission – "The Federal Reserve System is the central bank of the United States. It was founded by Congress in 1913 to provide the nation with a safer, more flexible, and more stable monetary and financial system. Over the years, its role in banking and the economy has expanded.” ‐ The Federal Reserve Website 1‐27 Example: the US Fed • Official Duties – Conducting national monetary policy – regulation of other banking entities to protect consumer credit rights – maintain national financial security – provides financial services to the US Government, official foreign institutions, and helps manage the nation's payment system 1‐28 Example: the US Fed • Structure of the Federal Reserve – All appointed by the president – Current Chairman ‐ Janet Yellen – Board of Directors – 12 federal reserve banks – 2 committees: • Federal Open Market Committee ‐ Monetary Policy • Federal Advisory Council ‐ Advisory Board 1‐29 Response of the Fed to 9/11 • Aim: To increase liquidity and maintain financial confidence • How was this achieved? 1. Open market operations 2. Direct lending of funds via the Discount Window 3. Daylight overdraft fees scrapped 4. The establishment of 'Swap Lines' 5. 50 basis points cut 1‐30
2016/9/20 Response of the fed to 9 /11 Response of the Fed to 9/11 3. Daylight overdraft fees scrapped egative reserve position in securities via repurchase agreements, which exchanges a ommercial banks' accounts at the fed, and would usually less liquid asset for a more liquid asset The Fed held about s61 billion of securities on September The Fed scrapped these fees for 10 days after 9/11 2th-around 2.5 times the amount they held the previous Overdrafts peaked on September 14th at $150 billion 2. Direct lending of funds via the Discount window 4. The establishment of ' Swap Lines A US monetary policy tool that allows financial institutions Central Banks to borrow money from the fed in order to help reduce short term liquidity shortages untry s Central bank $46 billion was distributed out on September 12th-200 The fed set up Swap lines with the ECB and BofE of s50 times that of the average day billion and S10 billion respecti Response of the Fed to 9/11 Response to the 2008 Financial Crisis 5. 50 basis point cut The Fed undertook"a series of unprecedented policy actions to contain the broader risks the financial September 17th crisis posed to the economy. Provide liquidi Decreases the cost of Repair failing financial markets Support crucial financial institutions flow of income and provides liquidity. Response to the 2008 Financial Crisis Response to the 2008 Financial Crisis lEnder of last Resort" Too Target Federal Funds and Discount Rates Discount window vailable credit was offered 3. The Fed lent to foreign central banks Term auction Facility (2007 /11/2-2010/3/8) TAF issued 28-dayfand later 84-day) loans and auctioned "" mary credit program, but those still considered financially sound. These loans were fully collateralized and allocated in Primary Dealer Credit Facility(2008/3/17-2010/2/1) 6
2016/9/20 6 Response of the Fed to 9/11 1. Open market operations – The Fed's New York Trading Desk bought US Treasury securities via repurchase agreements, which exchanges a less liquid asset for a more liquid asset – The Fed held about $61 billion of securities on September 12th ‐ around 2.5 times the amount they held the previous Wednesday 2. Direct lending of funds via the Discount Window – A US monetary policy tool that allows financial institutions to borrow money from the Fed in order to help reduce short term liquidity shortages. – $46 billion was distributed out on September 12th ‐ 200 times that of the average day 1‐31 Response of the Fed to 9/11 3. Daylight overdraft fees scrapped – Daylight overdraft creates a negative reserve position in commercial banks’ accounts at the Fed, and would usually incur fees – The Fed scrapped these fees for 10 days after 9/11 – Overdrafts peaked on September 14th at $150 billion ‐ 60% higher than usual 4. The establishment of 'Swap Lines' – A reciprocal currency agreement between Central Banks to ensure a liquidity of a country's currency at another country's Central bank – The Fed set up Swap lines with the ECB and BofE of $50 billion and $10 billion respectively 1‐32 Response of the Fed to 9/11 • 5. 50 basis point cut – Rate dropped on September 17th – Dropped from 3.5% to 3.0% – Decreases the cost of borrowing from the Fed – Increases the circular flow of income and provides liquidity. 1‐33 Response to the 2008 Financial Crisis • The Fed undertook “a series of unprecedented policy actions to contain the broader risks the financial crisis posed to the economy. – Provide liquidity – Repair failing financial markets – Support crucial financial institutions 1‐34 Response to the 2008 Financial Crisis • Conventional Interest Rate Tools Source： http://www.newyorkfed.org/markets/statistics/dlyrates/fedrate.html. 1‐35 Response to the 2008 Financial Crisis • “Lender of Last Resort” Tools – Discount window 1. Maturity of loans was extended; 2. Available credit was offered; 3. The Fed lent to foreign central banks – Term Auction Facility (2007/11/2 – 2010/3/8) TAF issued 28‐day(and later 84‐day) loans and auctioned them off to a wider set of institutions than that of the primary credit program, but those still considered financially sound. These loans were fully collateralized and allocated in a Dutch auction with no reserve price. – Primary Dealer Credit Facility(2008/3/17 – 2010/2/1) 1‐36
2016/9/20 Response to the 2008 Financial Crisis History of PBoc 1948-1952: establishment of pboc and the national Term Securities Lending Facility(2008/03/11-2010/02/10) banking system Asset-backed Commercial Paper Money Market Mutual Fund People's Bank of China was established in Dec 1st, Liquidity Facility( AMLF, 2008/09/19-2010/02/01) 1948 in Shijiazhuang based on an consolidation of Commercial Paper Funding Facility(2008/10/07-2010/02/01) e huabei Bank, the beihai bank and the xibei Investor Funding Facility(2008/11/24- 2009/10/30) Farmer Bank in northern China First set of rmb was issued and became the fiat 4. Expanded Open Market Operations Agency Mortgage- Backed Securities Purchases In southern part of China, Chiang Kai-sheks Treasuries Purchases and Maturity Extension Program and national currency was still circulating freely Reinvestment Policy History of PBoc History of PBoc 1948-1952: establishment of Pboc and the national 1948-1952: the establishment of PBoc and the banking syste national banking system PBoC moved to Beiping(now Beijing)in Feb 1949 Most private banks went bankruptcy due to the From Sept. 1949, PBoc became directly financial regulations by PBoc supervised by the State Council PBoC helped transforming private-owned banks to People's Republic of China was established in Oct1, joint-owned ones Foreign banks'business was halted; foreign PBoC's major functions included money supply, currencies were prohibited circulating in China treasury management, stabilizing national Others were transformed to joint-owned (priva financial markets and supporting economy and government)banks reconstruction after civil war History of PBoc History of PBoC 1953-1978: national bank in the planned economy 1979-1992: transition from a national bank to the central bank PBoC served the national institution that governed In 1978, China began to adopt the reform and the whole financial sector and took the banking opening-door policy Various forms of financial institution(commercial PBoC controlled both the sourcing and anks, trusts, insurance companies )came forth, a employment of capitals in the planned economy central bank was necessary for the regulation In Sept. 1983, State Council decided to have the adjusting the money circulation by providing all PBoC function as a central bank with the separation of ICBC owned firms and even individuals 7
2016/9/20 7 Response to the 2008 Financial Crisis • 3. Credit Market Liquidity Tools – Term Securities Lending Facility(2008/03/11‐2010/02/10) – Asset‐backed Commercial Paper Money Market Mutual Fund Liquidity Facility(AMLF, 2008/09/19‐2010/02/01) – Commercial Paper Funding Facility(2008/10/07‐2010/02/01) – Money Market Investor Funding Facility(2008/11/24‐ 2009/10/30) – Currency Swap Agreements • 4. Expanded Open Market Operations – Agency Mortgage‐Backed Securities Purchases – Treasuries Purchases and Maturity Extension Program and Reinvestment Policy 1‐37 History of PBoC • 1948‐1952: establishment of PBoC and the national banking system – People’s Bank of China was established in Dec.1st, 1948 in Shijiazhuang based on an consolidation of the Huabei Bank, the Beihai Bank and the Xibei Farmer Bank in northern China – First set of RMB was issued and became the fiat money in northern China – In southern part of China, Chiang Kai‐shek's national currency was still circulating freely. 1‐38 History of PBoC • 1948‐1952: establishment of PBoC and the national banking system – PBoC moved to Beiping (now Beijing) in Feb.1949 – From Sept. 1949, PBoC became directly supervised by the State Council – People’s Republic of China was established in Oct1, 1949 – PBoC’s major functions included money supply, treasury management, stabilizing national financial markets and supporting economy reconstruction after civil war 1‐39 1‐40 History of PBoC • 1948‐1952: the establishment of PBoC and the national banking system – Most private banks went bankruptcy due to the financial regulations by PBoC – PBoC helped transforming private‐owned banks to joint‐owned ones – Foreign banks’ business was halted; foreign currencies were prohibited circulating in China – Others were transformed to joint‐owned (private and government) banks History of PBoC • 1953‐1978: national bank in the planned economy – private banking industry almost disappeared – PBoC served the national institution that governed the whole financial sector and took the banking business – PBoC controlled both the sourcing and employment of capitals in the planned economy – PBoC took the responsibility of organizing and adjusting the money circulation by providing all sources of credits to state‐owned firms, joint‐ owned firms and even individuals. 1‐41 History of PBoC • 1979‐1992: transition from a national bank to the central bank – In 1978, China began to adopt the reform and opening‐door policy – Various forms of financial institution (commercial banks, trusts, insurance companies) came forth, a central bank was necessary for the regulation – In Sept. 1983, State Council decided to have the PBoC function as a central bank with the separation of ICBC 1‐42
2016/9/20 History of PBoc History of PBoc 1979-1992: transition from a national bank to the 1993-present: reinforce and complete the role of central bank PBoc took the status of central bank from Jan 1st, Commercial banking and policy banking gradually striped since 1993 Focused on setting and implementing monetary The Law of the people's Republic of china on the policy, controlling the total amount of credit and People's Bank of China passed by the third stabilizing commodity prices Plenum of the Eighth National People's Congress Lending and depository business was transferred on March 18, 1995, legally confirmed the Pocs to Industrial and Commercial Bank of china central bank status The required reserve and rediscount rate system (lending to specialized banks)was set up History of PBoc Functions of pboc 993-present: reinforce and complete the role of central bank CSRC and CIRC established in 1992 and 1998 security and insurance regulatory function of The draft amendment of Law on the people's Bank of China passed on Dec 22, 2003 Under the guidance of the State Council, the Pboc CBRC established in 2004 to supervise the ormulates and implements monetary policy financial industry prevents and resolves financial risks, and safegua financial stability. PBoCs Required Reserve Ratio PBoC's Required Reserve Ratio (1984-2003) (2003-2016) red Reserve ratio 11984 Resident Deposit 40 1985--1986 31987—-sept1988 Sept 1988--Mar 1998 Mar1998--Nov1999
2016/9/20 8 History of PBoC • 1979‐1992: transition from a national bank to the central bank – PBoC took the status of central bank from Jan 1st, 1984 – Focused on setting and implementing monetary policy, controlling the total amount of credit and stabilizing commodity prices – Lending and depository business was transferred to Industrial and Commercial Bank of China – The required reserve and rediscount rate system (lending to specialized banks) was set up 1‐43 History of PBoC • 1993‐present: reinforce and complete the role of central bank – Commercial banking and policy banking gradually striped since 1993 – The Law of the People's Republic of China on the People's Bank of China passed by the Third Plenum of the Eighth National People's Congress on March 18, 1995 , legally confirmed the PBoC's central bank status 1‐44 History of PBoC • 1993‐present: reinforce and complete the role of central bank – CSRC and CIRC established in 1992 and 1998, security and insurance regulatory function of PBoC striped; – The draft amendment of Law on the People‘s Bank of China passed on Dec 22, 2003 – CBRC established in 2004 to supervise the financial industry 1‐45 1‐46 Functions of PBoC • Under the guidance of the State Council, the PBoC formulates and implements monetary policy, prevents and resolves financial risks, and safeguards financial stability. PBoC’s Required Reserve Ratio (1984‐2003) Year Required Reserve Ratio 1 1984 Corporate Deposit 20% Village Deposit 25% Resident Deposit 40 2 1985——1986 10% 3 1987——Sept 1988 12% 4 Sept 1988——Mar 1998 13% 5 Mar 1998——Nov 1999 8% 6 Nov1999——Sept 2003 6% 1‐47 1‐48 PBoC’s Required Reserve Ratio (2003‐2016) 6% 8% 10% 12% 14% 16% 18% 20% 22%
2016/9/20 One-year Deposit Rate Quarterly GDP Growth (2003-2016) (2008~2016Q2) Monthly Inflation POcS (2008~2016M8) Open Market Operations PBoC's RMb oMo started from 1998 anks) have been chosen to imary dealers that can trade large volume onds with OMO instruments Issuance of central bank bills PBoC s OMO Instruments Example of PBoC's Reverse Repo June 29, 2015)China PBOC Injects Again Vi PBoC sells bonds(and takes back liquidity )and Reverse Repo Despite RRR Cut buys them back (and releases liquidity) in the future(28 days or more) NY50 billion via 7-day reverse repos into the interbank econdary market trading market via its open market operations on tuesday. PBoC buys or sells bonds in the secondary market to release or get back liquidi ut the deposit tio to selected banks over the Issuance of central bank bills weekend and money rates have already moved lower. PBoc issues bills to get back liquidity and releases The injection surprise as the pboc has already cut the deposit reserve ratio to selected banks over the weekend and money rates have already moved lower. 9
2016/9/20 9 1‐49 One‐year Deposit Rate (2003‐2016) 1.50% 2.00% 2.50% 3.00% 3.50% 4.00% 4.50% Quarterly GDP Growth (2008~2016Q2) 1‐50 11.30% 11.00% 10.60% 9.60% 6.60% 7.50% 8.20% 9.20% 12.10% 11.20% 10.70% 10.40% 9.70%9.60% 9.40% 9.20% 8.10% 7.60% 7.40% 7.90% 7.70% 7.50% 7.80%7.70% 7.40%7.50% 7.30%7.30% 7% 7% 6.90%6.80%6.70% 6% 7% 8% 9% 10% 11% 12% 13% 2008Q1 2008Q2 2008Q3 2008Q4 2009Q1 2009Q2 2009Q3 2009Q4 2010Q1 2010Q2 2010Q3 2010Q4 2011Q1 2011Q2 2011Q3 2011Q4 2012Q1 2012Q2 2012Q3 2012Q4 2013Q1 2013Q2 2013Q3 2013Q4 2014Q1 2014Q2 2014Q3 2014Q4 2015Q1 2015Q2 2015Q3 2015Q4 2016Q1 2016Q2 Monthly Inflation (2008~2016M8) 1‐51 ‐2% 0% 2% 4% 6% 8% 10% 08M1 08M4 08M7 08M10 09M1 09M4 09M7 09M10 10M1 10M4 10M7 10M10 11M1 11M4 11M7 11M10 12M1 12M4 12M7 12M10 13M1 13M4 13M7 13M10 14M1 14M4 14M7 14M10 15M1 15M4 15M7 15M10 16M1 16M4 16M7 PBoC’s Open Market Operations • PBoC’s RMB OMO started from 1998. • In 2012, 50 financial institutions (mainly commercial banks) have been chosen to be the primary dealers that can trade large volume of treasury bonds with PBoC. • OMO instruments – Repo – Reverse repo – Secondary market trading – Issuance of central bank bills 1‐52 PBoC’s OMO Instruments • Repo (and Reverse repo) – PBoC sells bonds (and takes back liquidity) and buys them back (and releases liquidity) in the future (28 days or more) • Secondary market trading – PBoC buys or sells bonds in the secondary market to release or get back liquidity • Issuance of central bank bills – PBoC issues bills to get back liquidity and releases liquidity when bills are due. 1‐53 Example of PBoC’s Reverse Repo • (June 29, 2015) China PBOC Injects Again Via Reverse Repo Despite RRR Cut – The People's Bank of China unexpectedly injected another CNY50 billion via 7‐day reverse repos into the interbank market via its open market operations on Tuesday. – The injection came as a surprise as the PBoC has already cut the deposit reserve ratio to selected banks over the weekend and money rates have already moved lower. – The injection came as a surprise as the PBoC has already cut the deposit reserve ratio to selected banks over the weekend and money rates have already moved lower. 1‐54
2016/9/20 Examples of PBoc's Reverse Repo Examples of PBoc's Reverse Repo The reverse repo was priced to yield 2.25 per cent compared with Monday s average of 2. 6935% and las Friday' s 2.9292%. Traders believe the injection is partly to give stock vestors more confidence and to reaffirm the pboc's easing stance remains unchanged June 6, 2016)Chinese central bank pumps 40b yua into market the cost at which Chinese banks lend to one another. The People s Bank of China(PBoC) pumped the huge sum dropped by 0.1 basis point to 1.998 per cent after the in a seven-day reverse repurchase agreements(repo),a process in which central banks purchase securities from banks with an agreement to resell them in the future. Examples of Pboc s reverse repo Examples of PBoc's Reverse Repo Sept 12, 2016: China PBOC Injects Combined CNY160 BIn; 28D Reverse Repo Back PBOC and will further push up short term money rates. The People' s Bank of China injected a total of CNY160 billion pt. 18, 2016: China PBoC Injects CNY250 BIn including CNY60 billion via the 28-day reverse repo. Continues 28-Day Reverse Repo holiday month, which tends to fall in January or Februa traders said, including CNY70 billion via a 28-day reverse The PBoC last used the 28-day reverse repo to inject The PBoC also injected a hefty cny180 billion through a during the Chinese New Ye seven-day reverse repo on monday. It skipped the 14-day Now the focus is on whether the 28-day reve maturity in Monday 's operation. long National Day holiday sta or whether it will become a permanent omo tool like the A total of CNY80 billion in outstanding PBOC reverse repos matures Monday, resulting in a net injection of CNY170 Example of PBoC Cutting Examples of PBoC Cutting RRR and Interest rate RRR and Interest Rate June 28, 2015)China cuts reserve ratio, interest The central bank cut the rrr for commercial banks serving rates to bolster growth al areas, agriculture and small businesses by 50 basis Chinas central bank cut both the requirement reserve ratio(RRR), the amount of reserves banks required to hold, The RRr for finance anies, or non-bank financial stitutions, will be lowered by 300 bps, the PBoc real economy and promote restructuring, said the People's Bank of China(PBoC)in an agricultural development as well as small announcement usinesses, the PBOC said 10
2016/9/20 10 Examples of PBoC’s Reverse Repo – The seven day repo opened at 2.58% on Tuesday, compared with Monday's average of 2.6935% and last Friday's 2.9292%. – Traders believe the injection is partly to give stock investors more confidence and to reaffirm the PBoC's easing stance remains unchanged. • (June 6,2016) Chinese central bank pumps 40b yuan into market – The People’s Bank of China (PBOC) pumped the huge sum in a seven‐day reverse repurchase agreements (repo), a process in which central banks purchase securities from banks with an agreement to resell them in the future. 1‐55 Examples of PBoC’s Reverse Repo – The reverse repo was priced to yield 2.25 per cent, unchanged from Friday’s injection of 40 billion yuan, according to a PBOC statement. – The move followed a net injection of 70 billion yuan and 95 billion yuan into the financial system on last week. – In Monday’s interbank market, the benchmark overnight Shanghai Interbank Offered Rate (Shibor), which measures the cost at which Chinese banks lend to one another, dropped by 0.1 basis point to 1.998 per cent after the injection. 1‐56 Examples of PBoC’s Reverse Repo • Sept. 12, 2016: China PBOC Injects Combined CNY160 Bln; 28D Reverse Repo Back – The People's Bank of China injected a total of CNY160 billion via reverse repos in its open market operations on Tuesday, including CNY60 billion via the 28‐day reverse repo. – This is the first time in four years that the PBOC has used the 28‐day reverse repo outside of the Chinese New Year holiday month, which tends to fall in January or February. – The PBOC last used the 28‐day reverse repo to inject liquidity in early February to meet the demand for cash during the Chinese New Year holiday. – Now the focus is on whether the 28‐day reverse repo is just for the week‐long National Day holiday starting October 1 or whether it will become a permanent OMO tool like the 14‐day maturity. 1‐57 Examples of PBoC’s Reverse Repo – The latter would suggest more longer‐term funds from the PBOC and will further push up short term money rates. • Sept. 18, 2016: China PBOC Injects CNY250 Bln, Continues 28‐Day Reverse Repo – The People's Bank of China injected a total of CNY250 billion via reverse repos in its open market operations Monday, traders said, including CNY70 billion via a 28‐day reverse repo. – The PBOC also injected a hefty CNY180 billion through a seven‐day reverse repo on Monday. It skipped the 14‐day maturity in Monday's operation. – A total of CNY80 billion in outstanding PBOC reverse repos matures Monday, resulting in a net injection of CNY170 billion for the day. 1‐58 Example of PBoC’ Cutting RRR and Interest Rate • (June 28, 2015) China cuts reserve ratio, interest rates to bolster growth – China's central bank cut both the requirement reserve ratio (RRR), the amount of reserves banks required to hold, and benchmark interest rates on Saturday. – The credit‐easing move, to be effective on Sunday, aims to "support the real economy and promote restructuring," said the People's Bank of China (PBOC) in an announcement. 1‐59 Examples of PBoC’ Cutting RRR and Interest Rate – The central bank cut the RRR for commercial banks serving rural areas, agriculture and small businesses by 50 basis points (bps). – The RRR for finance companies, or non‐bank financial institutions, will be lowered by 300 bps, the PBOC announced. – The purpose of the RRR reduction is to boost financial institutes' abilities to support farmers, rural and agricultural development as well as small and micro businesses, the PBOC said. 1‐60