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Briefing

China: Monetary Policy

Appears in: Asia/Pacific, Finance and Banking, Macroeconomy, China, Northeast Asia, Monetary Policy and Inflation, Money Markets

Critical Issues

Background:

The global economic crisis pushed China into deflation in early 2009, despite the loose monetary policy adopted by the People's Bank of China (PBoC). China's central bank cut the policy lending rate and reserve requirements for banks, but the primary tool of monetary policy in China remains the credit channel. New lending surged in H1 2009, expanding the monetary base (M2) more than 25% y/y, but the velocity of money remained limited. As the slack in the economy narrowed, deflation first eased and then prices began accelerating. Inflationary pressures should continue to prompt monetary tightening from Chinese authorities, particularly because core inflation is also rising.

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Associated Readings

Research Hong Kong Monetary Authority Laurent L. Pauwels and Dong He June 2008 What Prompts the People's Bank of China to Change its Monetary Policy Stance? Evidence from a Discrete Choice Model Blogs Asia EconoMonitor Michael Pettis May 04, 2009 Distortions in the Chinese lending environment Analysis The Economist Aug 27, 2009 Chinese bank lending: Follow the money

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