Market Pressure on rmb reform Market Pressure on rMb reform BOP of China 1991"2016(sbln) FX Reserve 2001"2016M9(Sbln) NM Erre and masers Cost of Maintaining Back to the Impossible Trinity a Stable Exchange Rate The money becomes funds outstanding for foreign exchange ° monetary base For the economy: either inflation or asset bubbles Pure floating Cost of sterilizing became higher when more hot money Low interest rate: borrow for firms and ouseholds and to lend for commercial banks Cost of Maintaining Cost of Maintaining Stable Exchange Rate a Stable Exchange Rate Real estate market came to a boom since 2001 Central Bank Balance Sheet for China(2004-2015) Investment channels for foreign capital: FDI? Security narket? Real estate market? More challenges China entered WTO at Dec 2001, promising to open he financial markets in 5 years aJt 099 101: 1a 14 071 D a7 a au L10 a L14 L More than 20 regulation items in capital flowing L2112151B been abolished anking sector was still weak; joint-stock reform in the banking sector started from 2001 m:田田田B出田 Net Finarcial Assets000a自020050200a00200200xf2016/11/2 9 Market Pressure on RMB Reform: BOP of China 1991~2016($bln) 49 -200 -100 0 100 200 300 400 500 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 Current Account Capital and Financial Account Net Error and Omissions *2016-1H is simply doubled to get the whole year data. Market Pressure on RMB Reform: FX Reserve 2001~2016M9($bln) 50 212 217 423 610 819 1,066 1,528 1,946 2,399 2,847 3,197 3,312 3,820 3,840 3,330 3,166 0 500 1,000 1,500 2,000 2,500 3,000 3,500 4,000 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 Back to the Impossible Trinity 4-51 Pure floating Full capital controls Monetary independence Monetary union Full financial integration Exchange rate stability Increased capital mobility 4-52 Cost of Maintaining a Stable Exchange Rate • More capital came during 2002 to 2004 expecting RMB revaluation • SAFE was forced to buy to stabilize the exchange rate • The money becomes funds outstanding for foreign exchange in PBoC’s B/S • monetary base enlarged — loss of monetary independence – For the economy: either inflation or asset bubbles – Cost of sterilizing became higher when more hot money came • Low interest rate: strong incentive to borrow for firms and households and to lend for commercial banks 4-53 Cost of Maintaining a Stable Exchange Rate • Real estate market came to a boom since 2001 • Investment channels for foreign capital: FDI? Security market? Real estate market? • More challenges – China entered WTO at Dec 2001, promising to open the financial markets in 5 years; – More than 20 regulation items in capital flowing been abolished; – Banking sector was still weak; joint-stock reform in the banking sector started from 2001 Cost of Maintaining a Stable Exchange Rate in trillion Yuan 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Total Assets 5.11 6.20 7.87 10.37 12.86 16.91 20.71 22.75 25.93 28.10 29.45 31.73 33.82 31.78 Foreign Assets 2.32 3.11 4.70 6.33 8.58 12.48 16.25 18.53 21.54 23.79 24.14 27.22 27.86 25.38 Treasury Bonds 0.29 0.29 0.30 0.29 0.29 1.63 1.62 1.57 1.54 1.54 1.53 1.53 1.53 1.53 Credit to Commercial Banks 1.00 1.06 0.94 0.78 0.65 0.79 0.84 0.72 0.95 1.02 1.67 1.31 2.5 2.66 Credit to Other Financial Institutions 0.74 0.75 0.90 1.33 2.20 1.30 1.19 1.16 1.14 1.07 1.00 0.89 0.78 0.67 others 0.76 0.99 1.03 1.63 1.14 0.71 0.80 0.78 0.76 0.68 1.10 0.78 1.14 1.53 Liabilities 5.09 6.18 7.84 10.35 12.84 16.89 20.69 22.73 25.91 28.08 29.43 31.71 33.80 31.76 Monetary Base 4.51 5.28 5.89 6.43 7.78 10.15 12.92 14.40 18.53 22.46 25.23 27.10 29.41 27.64 Central Bank Bills 0.15 0.30 1.11 2.03 2.97 3.45 4.58 4.21 4.05 2.33 1.39 0.78 0.65 0.66 Central Government Deposit 0.31 0.50 0.58 0.75 1.02 1.71 1.70 2.12 2.43 2.27 2.08 2.86 2.27 2.72 Foreign Liabilities 0.04 0.05 0.06 0.06 0.09 0.09 0.07 0.08 0.07 0.27 0.15 0.28 0.18 0.18 Others 0.08 0.05 0.21 1.06 0.97 1.48 1.42 1.93 0.82 0.75 0.58 0.69 1.29 0.56 Net Financial Assets 0.02 0.02 0.02 0.02 0.02 0.02 0.02 0.02 0.02 0.02 0.02 0.02 0.02 0.02 4-54 Central Bank Balance Sheet for China(2004-2015)