China'sgarbage_China’s,Monetary,Policy,Instruments,(2001-2010):,Paradox,,Analysis,and,Suggestions

　　Abstract: Through a systematic analysis of China’s monetary policy instruments adopted between 2001 and 2010, the author argues that raising required reserve ratios (or RRRs) cannot reduce the overall supply of funds, while raising the deposit and loan interest rate expands credit. Compared with the above two approaches, controlling incremental loan scale is more effective. During the 12th Five-Year Plan period (2011-2015), China should improve its monetary policy system in five aspects: the balance sheet structure of The People’s Bank of China (PBOC), the intermediary objective and operation instruments, market orientation of the deposit and loan interest rate, ultimate objective of monetary policies and establishment of a system framework for prudent macro financial management.
　　Key words: monetary policy, instrument, rationale, required reserve ratios (or RRRs)
　　JEL Classifications: E52
　　After what may be described as dazzling monetary policy changes from “tight” in 2008 and “moderately loose” during 2009-2010 to the current “prudent” policy, PBOC is now focusing more on establishing a system framework for prudent macro financial management. This marks a new era for China’s monetary policy control. Against this backdrop, reviewing the entire process, rationale, and the effects of China’s monetary policy control in the first decade of the 21st century will carry a significant impact for enhancing China’s monetary and financial theory and policy practice.
　　A monetary policy system includes the ultimate objective, intermediary objective, and operation instruments, and so forth. Operation instruments are the basic means for achieving the intended objective and the mechanism of transmitting monetary policy intentions. Due to limited space and also because Western theories cannot truly explain the operation rationale of China’s monetary policy instruments, this paper focuses on exploring reasons for selecting certain policy instruments, the operation process itself and the practical effects. Analysis is made of instruments adopted between 2001 and 2010, including RRRs, benchmark deposits, and loan interest rates and control over the incremental loan scale.
　　1. The Rationale of Adjusting the RRRs
　　The RRRs were kept down in the 1990s but have been rising throughout the period 2001 to 2010. As shown in Figure 1, after hitting the trough of 6 per cent in November 21, 1999 the RRRs rose rapidly amidst several monetary policy changes during the first decade of the 21st century. The RRRs bear “mandatory” attributes. Once implemented, financial institutions should comply without room for any price or quantity “negotiation” with the PBOC. Adjusting the RRRs directly influences financial institutions, their business activities, and loanable funds (creation of derivative money) . Theoretically, raising the RRRs directly reduces the supply of money in the financial market, and vice versa. However, there is a major theoretical defect in measuring the effect of RRRs adjustment simply by the money multiplier calculation formula, because it puts aside financial institutions’ various reserves, purchases of securities and the examination of solvency of loan customers. It therefore fails to reflect the truth. Moreover, it fails to reflect how these funds acquired by the PBOC (through raising RRRs) are used, and fabricates a deceptive “disappearance” of funds upon accessing the PBOC account.