Chinese Monetary Policy Research Articles

Uncovering heterogeneous regional impacts of Chinese monetary policy

Uncovering heterogeneous regional impacts of Chinese monetary policy

Can you hear me now? Identifying the effect of Chinese monetary policy announcements

Do Chinese monetary policy announcements matter? This study evaluates how relevant Chinese monetary policy announcements are to Chinese financial markets and the real side of the economy. Chinese monetary policy is identified by estimating a “target” factor measuring policy surprises and a “path” factor measuring future expectations of policy using price changes to Chinese financial derivatives on policy announcement dates. Local projection results show that 1) Chinese Treasury yields and interbank rates respond persistently, suggesting that policy transmission through an interest-rate channel exists; 2) Equities and exchange rates do not respond to policy announcements instantaneously, but with a lag; 3) Future expectations of Chinese monetary policy play a larger role than surprises, 4) Real variables show evidence of policy transmission, and 5) policy transmission may be sticky due to information frictions.

State-owned Economy, Internet Finance, and Monetary Policy Effects in China: Can Technological Innovation Replace Institutional Reform?

ABSTRACT This article applies firm-level quarterly data to investigate the effects of property rights reform and internet finance on Chinese monetary policy effectiveness. We find that internet finance development strengthens monetary policy effects through the interest rate channel more than the credit channel. However, the increasing proportion of state-owned enterprises blocks the interest rate channel. It may improve the monetary operations during a severe recession as it weakens the financial accelerator mechanism. Nevertheless, it hinders the monetary policy’s overall effectiveness and the benefit of Fintech innovations in the long term. Hence, institutional reforms are needed to complement Fintech developments.

International transmission of China’s monetary policy

ABSTRACT This paper quantifies the spillover effects and explores the transmission channels in a panel of advanced and emerging economies. Using a panel local projection model to identify Chinese monetary policy shock by the change in the 7-day repo rate in the interest rate swap market, we find that China’s monetary tightening causes a significant drop in global output, with a larger decline in emerging economies than in advanced economies. Moreover, spillovers of Chinese monetary policy mainly depend on the trade channel, while the exchange rate channel and the financial channel are insignificant. To further explain empirical findings, we develop a basic two-country model and unveil the inherent logic.

The Interplay of Chinese Monetary Policy, the Offshore Renminbi Market, and Capital Flows: An Empirical Analysis via State Space Models

Abstract This paper proposes state space modeling and Kalman filtering as the theoretical foundation to explore the impact of China’s monetary policy on the offshore RMB market and capital flows. In the state space model, the relationship between observable and unobservable variables is established, with the Hidden Markov Model representing the state vector as a first-order Markov process to estimate unobservable variables. Additionally, a variable parameter state space model is proposed to alter the relationship between explanatory variables and the dependent variable. Kalman filtering, as the core of the state space model solution algorithm, calculates the likelihood function through prediction error decomposition to estimate unknown parameters. The optimal lag of the model is determined to be 2 after constructing the VAR model in the empirical analysis, and the first-order autoregressive model is used to calculate variable parameters. The elasticity coefficient of the depth of development of the offshore RMB market on capital flows is the most significant variable, with a value of 0.96. Following this, the RMB exchange rate has an elasticity coefficient of 0.78.

Chinese monetary policy spillovers on its international portfolio investment flows

This paper examines Chinese monetary policy spillovers on its international portfolio investment flows with a factor-augmented vector autoregression (FAVAR) model. The paper extracts a FPI factor from certain time series to measure monthly foreign portfolio investment flows (FPI). Four Chinese monetary policies are considered: central-bank target policy rate; required reserve ratio; M2; banks' loans. The robust and significant results show that interest rates and banks' loans have significant impact on Chinese international portfolio investment flows, while changes in reserve requirements are not effective. It reveals the increasingly important effects of Chinese monetary policies on its cross-border portfolio investment flows following decades' capital account openness and the reform of interest rate liberalization in China, which indicates that Chinese monetary policy is approaching to a market-based framework.

An Empirical Analysis of the Central Bank of China's Monetary Policy and the Impact of its Communications on Market Interest Rates, Liquidity and Credit

As one of the largest world's economies, China’s economy plays an important role at regional and global levels. In this context, with the fast opening steps of the Chinese economy to international markets, the Chinese Central Bank (PBC or PBOC) has adjusted its mechanisms to the needs of local and international economies. Chinese monetary policy is designed to keep prices and economic growth stable and to ensure the country’s economic development. The Chinese Central Bank has a significant influence over Chinese interest rates, interbank rates, and changes in liquidity and credit. The main goal of this research paper is to describe the role of the Chinese Central Bank in delivering Chinese monetary policy and its changes over the past few years. Our research paper is dedicated to verifying how the Chinese Central Bank's press releases are useful indicators for the future trend of market interest rates after constructing a numerical index representative of expansive or restrictive net signals contained in any of the PBC Communications examined. An empirical analysis over Chinese Monetary Policy Communications (Reports) is included in this research paper, presenting how the Central Bank of China is implementing its monetary policy in order to influence the development of its economic growth through its market interest rates, liquidity and credit movement.

Monetary policy surprises and corporate investment growth in China

This paper analyzes the impact of unexpected changes in Chinese monetary policy on the investment growth of public firms. Previous research on the Chinese economy has not effectively linked firm-level investment determination in corporate finance with monetary policy transmission in macroeconomics, thus limiting our understanding of the characteristics and mechanisms of this effect. We proxy the unexpected monetary policy changes by the M2 growth shocks identified from monetary policy rules. Our results indicate that the change in money growth significantly affects investment growth at the firm level. Positive shocks increase corporate investment growth, whereas negative ones do the opposite. However, the extent of this effect varies over time and gets more substantial under restrictive shocks. Such an effect also differs in magnitude across firms due to firm-level heterogeneous characteristics, highlighting the importance of corporate financial constraints and credit channels of monetary policy transmission.

Analysis of Interest Rate Hikes and Exchange Rate Between U.S. and China

Recently, the rates between Chinese RMB and the USD have been on the rise with the deflation of Chinese RMB. This paper looked into the relationship of interest rate hikes and exchange rates between the U.S. and China. The interest rate in the U.S. is closely related to the strength of U.S. dollar and capital flow between the two largest economies in the world, therefore, the research into the topic could help understand how the interest rate hike in the U.S. currently would affect the exchange rate between the two countries. In this paper, methods like theoretical analysis are used to understand the historical background of interest rate hikes, the deciding mechanism, and used a case study to understand the impact of U.S interest hike on CNY-USD exchange rate. The result showed that the U.S. interest rate hike would lead to a depreciation of CNY. Meanwhile, as the Chinese monetary policy focuses more on independence, the correlation becomes lower.

Monetary policy in China: A Factor Augmented VAR approach

This paper investigates the effectiveness of Chinese monetary policy. We employ the data-rich Factor Augmented VAR (FAVAR) model to address the paucity of Chinese data. We find that the Divisia monetary aggregate M2 (DMA2) that considers both the quantity of monetary assets and the user-cost of the money/forgone interest rate is more effective in boosting economic activities and prices than other instruments (e.g., interest rate, simple money supply M2, and required reserve ratio). These other instruments produce outcomes that contradict theoretical predictions in at least one area. Therefore, we suggest the use of the DMA2 to steer the performance of the Chinese economy effectively.

Long-run Effects of Monetary Policy of China on Its Economic Growth

Despite considerable reforms of Chinese monetary policy, very few papers have empirically examined the long-run effects of monetary policy on China’s economic growth. Our purpose is to shed some light on it. We use money supply, real effective exchange rate, and real interest rate to describe monetary policy of China. We first apply the Granger causality test to annual data from 1980 to 2020 to examine the relationship between monetary policy and China’s economic growth measured by Chinese real GDP. Our results suggest both money supply and real effective exchange rate Ganger cause Chinese real GDP, while real interest does not. We then adopt the autoregressive distributed lag (ARDL) model without asymmetric effects and nonlinear ARDL with asymmetric effects of exchange rate to estimate the impact of monetary policy on China’s economic growth. Our long-run results indicate that expansion of money supply would promote Chinese real GDP growth. Both higher interest rate and depreciation would hinder China’s economic growth. There are asymmetric effects of exchange rate on growth. Finally, the CUSUM and CUSUMQ stability test results reveal that the relationship among money supply, real effective exchange rate, and real interest rate with Chinese real GDP is stable.

A Study on the Impact of Chinese Monetary Policy on Enterprises' Accrual Earnings Management

As one of the important means for enterprises to carry out accrual earnings management activities, which mainly relate to the adjustment of accounting estimates and the use of accounting policies to make the values of relevant accounting subjects meet the needs of enterprise managers and reach other stakeholders expectations. This paper empirically examines the relationship between changes in monetary policy and corporate accrual earnings management activities, by taking A-share companies from 2010 to 2020 in Shanghai and Shenzhen stock markets as the sample, and by classifying accrual earnings management activities into positive and negative, it more accurately captures the choice of accrual earnings management activities that companies tend to adopt in different periods. At the same time, this paper also analyzes the influence of ownership attributes on the management behavior of companies' accrual earnings management under different monetary policies from two aspects: state and non-state. By studying the influence of monetary policy on corporate accrual earnings adjustment, this dissertation is not only a supplement to previous researches on earnings management and monetary policy, but also points out new ideas for future research.

The Impact of China’s Monetary Policy on Stock Prices

The topic of this paper is the impact of Chinese monetary policy on stock price, and the importance of this study is mainly reflected with capital market gradually becomes a crucial feature of China's future economic development, the stock market, as a vital component of the capital market, is attracting more and more attention from the monetary authorities for its importance. In light of the aforementioned, this paper uses the M0, M1 and M2 data from 2010-2021, THE closing price of CSI 300 and the Shanghai interbank lending rate to build the VAR model to investigate how monetary policy affects stock prices. and the data in this paper are obtained from the CSMAR database and the Flush database. The study finds that although the money supply has a positive effect on stock prices and interest rates have a negative one, stock prices are still mostly controlled by their own fluctuations. This research offers some policy ideas based on this result.

China’s Monetary Policy and the Loan Market: How Strong is the Credit Channel in China?

AbstractWe study the macroeconomic relevance of credit supply effects in the transmission of Chinese monetary policy. Using combinations of zero and sign restrictions in a structural vector autoregressive framework, we simultaneously identify monetary policy shocks and supply dynamics in the loan market. Our results show that policy shocks which coincide with loan supply effects account for roughly 60% of the overall effects of policy induced output dynamics. Moreover, we find that it takes roughly one year that banks adjust their lending strategies and loan supply effects unfold completely. Overall, our results provide robust empirical evidence that the credit channel constitutes an important and economically relevant transmission channel for monetary policy in China.

Monetary policy transmission in China: dual shocks with dual bond markets

AbstractAlthough China’s monetary and financial system differs drastically from its Western counterpart, empirical studies covering this vast economy have often been simple reestimations or recalibrations of models originally designed to describe US or European monetary policy. In this paper, we aim to assess Chinese monetary policy and, in particular, monetary policy transmission through yield curves into the real economy. Our study takes into account the peculiarities of the Chinese economy: Namely, our model includes both China’s modern attempts at a market-based monetary policy as well as the “authority-based” one that is a relic of the original banking system. Besides, it considers the special nature of the Chinese treasury bond market, which is separated into two independent ones with very limited direct arbitrage opportunities between almost identical assets. Finally, it incorporates the role of real estate, which played an essential role in China during the last decade. Our results show that different monetary policy shocks cause asymmetric effects on macroeconomic and financial variables.

A High-Frequency Measure of Chinese Monetary Policy Shocks

A High-Frequency Measure of Chinese Monetary Policy Shocks

Time-varying monetary policy shocks and the dynamics of Chinese commodity prices

With the trading volume and openness of the Chinese commodity futures market being developed substantially in recent years, this paper explores the effects of Chinese monetary policy shocks on the dynamics of commodity futures prices under dynamic structural changes by imposing reduced constraints. The results show the following: (1) Monetary policy shocks are fundamental triggers for price changes in most Chinese commodity futures market indices and positive monetary policy shocks significantly push up both aggregate market indices and some sectoral market indices. (2) Commodity sectors have heterogeneous reactions to monetary policy shocks. For example, unlike other commodity sectors, grain is barely affected by monetary policy shocks, which may be due to price regulation of agricultural products and low levels of sector financialization. (3) The relationship between monetary policy shocks and price changes in commodity futures markets is time-varyingly dependent on the economic environment. In particular, the impulse responses for most of the commodity futures market indices tend to be larger during the global financial crisis period, then gradually declined from 2009.

The Analysis of Chinese Monetary Policies in Asian Financial Crisis and the COVID-19 Period and the Policy Forecast

In July 1997, the Asian Financial Crisis significantly impacted regional and global economies, particularly in Asia. Similarly, two decades later, the COVID-19 has had a great influence on the Chinese economy as an exogenous element of the demand shock. Bothe the two issues were linked to the contagion effect and asset bubbles. This article discusses the monetary policies used during the two periods and compares and forecasts the monetary strategy based on the current economic status. The Chinese government is suggested to continuously carry out expansionary monetary policy for enterprises and household consumption and helps establish a wider range of digital economy, and helps establish a wider range of digital economy including rural areas.

The Spillover Effects of Chinese Shocks on the Belt and Road Initiative Economies: New Evidence Using Panel Vector Autoregression

This paper investigates the spillover effects of Chinese real and monetary sector shocks on the Belt Road Initiative (BRI) economies. The study adopted a panel vector autoregression (PVAR) estimation technique to analyse the dynamic propagation of Chinese shocks in the real sector (gross domestic product (GDP) and trade openness (OPEN)) and monetary sector (nominal interest rate (NIR)) for a sample of 50 BRI countries from 2000 to 2017. The main results revealed that Chinese income shocks positively spill over to all macroeconomic variables except BRI countries’ consumer price index (CPI). However, the Chinese trade openness shock only has a temporary positive spillover to BRI international trade and a temporary negative spillover on its monetary policy. In addition, the Chinese monetary policy shock has a negative spillover on GDP and a positive spillover on CPI in BRI economies. Chinese shocks, however, do not constitute a significant source of variation in any interest variable. As explained by the Chinese income shock, the BRI interest rate is the highest percentage of variable variation accumulated over time. Further, the highest variation of Chinese trade shock is BRI trade openness, and lastly, the highest variation of Chinese interest rate shock is CPI in BRI economies. The beggar-thy-neighbour effect may dominate the positive trade effect and is a negative impact of the Chinese shocks. Hence, BRI economies should alleviate the adverse shocks since the upcoming rapid growth from the Chinese has disturbed the BRI economies. Our results reveal the importance of Chinese development on BRI partners’ economies and the significance of Chinese shocks in real and monetary sectors in assisting policymakers in designing international and monetary policy for BRI economies.

Digital infrastructure and economic growth—Evidence for China

China’s economic structure has made subtle changes with the development of digital economy. Along with the marginal diminishing effect of Chinese monetary policies and the increase of the overall leverage ratio, the Chinese economic growth mode of relying on real estate, trade and infrastructure construction in the past will not be sustainable in the next decade. This paper makes a theoretical analysis on the reduction of the search cost in digital economy. Also, this paper used empirical methods to study the relationship between China’s economic growth and digital infrastructure construction. In conclusion, the digital economy has reduced the search cost for people, and big data will become a product factor participating in labor distribution. In addition, this paper proposes for the first time that digital economy can effectively restrain inflation. The Chinese government needs to attach importance to the issue that current internet enterprise oligarchs will probably monopolize the usage of big data in the development of digital economy in the future and become the obstacle to effective economic growth. In addition, close attention should be paid to the vulnerabilities of financial and taxation systems for digital economic entities to avoid continuous disguised tax subsidies to internet oligarchs, thus preventing industrial monopoly.