Chinese Central Bank Outlines Future Direction of Monetary Policy, Financial Reforms


The People’s Bank of China has provided further signals as to future reforms of the country’s financial system and the direction of monetary policy in the lead up to incumbent governor Zhou Xiaochuan’s departure.

At a press conference held on 9 March as part of the meeting of China’s two legislative bodies, PBOC chief Zhou Xiaochuan (周小川), PBOC deputy governor Yi Gang (易纲) and head of the State Administration of Foreign Exchange (SAFE) Pan Gongsheng (潘功胜) fielded questions from 18 members of the domestic and overseas press on the topic of “Chinese Financial Reform and Development” (中国金融改革与发展).

Yi Gang said that the central government’s repeated reference to “stable monetary policy” and “moderate loosening and tightening” primarily signified the use of financial and monetary policy to support the real economy, and the creation of an external environment capable of preventing risk as well as stably advancing financial reforms.

With regard to the cancellation of M2 money supply growth targets, Yi said that market deepening and financial innovation in China would make the relationship between indicators such as M2 and economic trends more ambiguous and less predictable.

According to Yi the vast majority of countries are already dialling back the emphasis they place upon M2 as an indicator, and under these new conditions China will seek to optimise the structure of existing money and credit.

Zhou Xiaochuan said that total volume of China’s broad money supply is already quite large, and that “in actuality this pool of money could be used more efficiently.

“Once it’s used more efficiently, then there will no longer be an issue of tightness of funds,” said Zhou.

“During this process we will see a trend of the price of funds rising on the one hand, as well as see increases in efficiency reduce prices.

“In this regard, we need to respond with monetary policy and forex policy.”

With regard to ongoing reforms of the financial regulatory framework that kicked off with the establishment of the Financial Stability and Development Commission last July, Zhou Xiaochuan said that “during the final few days of the current National People’s Congress, there is the possibility that delegates will research and discuss reform of state agencies,” and that this would include further reform of financial regulatory departments.

“The information disclosed by the Financial Stability and Development Commission has already clearly outlined some of the key thoughts for financial reform, including placing the FSDC’s office under the People’s Bank of China, which clearly shows that PBOC will play an eve more important role under the new financial regulatory framework.”

Zhou said that the function of the FSDC would be to fill in “blanks” in financial regulation as soon as possible, as well as strengthen the formulation of financial regulation whenever regulatory defects arise.”

PBOC also flagged further opening of the Chinese financial sector, with Zhou informing journalists that “following the start of this new phase, we can have slightly more courage when it comes to opening of financial market entry requirements, and increase the level of opening slightly.”

According to Zhou”external opening” has a broader significance than just allow foreign-invested entities to engage in financial operations in China, and also involves Chinese financial institutions expanding around the globe as well as internationalisation of the renminbi.

“The central bank can continue to push for linkages between [China’s] capital markets and major capital markets around the world,”said Zhou.

“Additionally, various restrictions will be gradually removed as China steadily and gradually pushes ahead with capital account convertibility…internationalisation of the renminbi will also continue to forge ahead.”