انتقال سیاست های پولی مبتنی بر بازار: چگونه چین می تواند از اروپا تجربه کسب کند؟

We discuss the prospects for Chinese money market development and transition to market-based monetary policy operations based on a comparative historical analysis of the present Chinese situation and the development in 11 European countries from 1979 up to the launch of the European Economic and Monetary Union (EMU). Central banks in the latter group of countries typically had an incentive to encourage the formation of efficient benchmark segments in the domestic money markets for the conduct of open market operations as traditional quantity-oriented instruments became increasingly ineffective. China is displaying many of the same symptoms as the European countries in the 1970s and 1980s, including poor monetary transmission due to excess liquidity and conflicts of interest due to unclear priority among multiple policy goals. We conclude that in a number of aspects, current Chinese monetary policy operations are counter-productive to efforts to develop an efficient money market that can serve as arena for an effective market-based monetary policy, and provide policy recommendations.

The practical implementation, as well as the targets and the underlying objectives of monetary policy underwent significant changes in most industrial countries during a period from the late 1970s until the late 1990s. These changes were paralleled by a transformation of financial markets – including money markets as the main ‘forum’ for the implementation of monetary policy – consisting essentially of broad-based deregulation of credit systems on the one hand, and a rapid growth of alternatives to central-bank money as sources of financing on the other. The parallel processes of financial market development and reorientation of monetary policy are intertwined1 and mutually reinforcing, and have their roots in domestic historical and political-economy factors as well as in increased international financial integration (Forssbæck & Oxelheim, 2003). The weakness of the financial system is often argued to be an Achilles heel of the Chinese economy, and China is committed under its World Trade Organization (WTO) accession agreement to further opening up its financial system. This implies the removal of a large number of administrative restrictions, controls and regulations. Required reforms include opening up the capital account, liberalizing interest rates, and allowing foreign banks full access to the domestic market. There is a large (and growing) literature on the fragility of the Chinese banking sector, Chinese capital flows and capital flight, China's exchange rate regime, etc. However, the co-dependence between financial market development and increased effectiveness of monetary policy in the face of increased international integration – through a reorientation of the targets as well as the arsenal of instruments used by the central bank – is a less explored area of study. Because the money market is a key link between a country's financial system and its real economy, and the primary arena for the conduct of monetary policy, a poorly functioning money market is presently a key problem in China, as the development toward a market economy in other sectors and commitments under the WTO accession agreement have taken the need for reforms of beyond the point of no return. We argue in this paper that remnants of a traditional ‘dirigiste’, direct-control approach presently thwarts the effectiveness of monetary policy, and that with a more open financial system these problems are likely to persist, or even accelerate. We further argue that in several key respects – e.g. initial financial repression, increased capital mobility, poor transmission, and multiple targets – relevant to this line of inquiry, the present situation in China is comparable to that of several European countries in the 1980s. Although potentially an economic giant, the size of the Chinese economy and its dependence on external markets during the 1990s and early 2000s make it more comparable with small and open, rather than with larger, developed economies. The paper thus builds on research on money market development and monetary policy reform in a sample of small or medium-sized, open European countries2 and extracts lessons for China from the experiences of these countries. Apart from their dependence on external markets, the choice of benchmark countries is also motivated by the fact that the money markets for these countries’ currencies were virtually non-existent at the beginning of the 1980s, but then went though phases of emergence, growth, sophistication and international integration over a period of approximately 20 years. The process is thus in some sense ‘completed’, rather than still ongoing, as in most other Asian countries (except Japan, which, however, is a special case for other reasons), or in alternative possible benchmark countries. The countries also represent the full spectrum with regard to the level of ambition of exchange-rate policy and ‘reputation’: from hard-currency, low-interest-rate countries to countries with a near-emerging-market status. Due to this diversity, our eleven benchmark countries constitute an excellent ‘laboratory’ with regard to the link between money market development and the conduct of monetary policy. The paper is organized as follows. In Section 2 we briefly summarize Chinese monetary policy in recent years. Section 3 describes the development of money markets in the benchmark countries and puts China into that perspective. In Section 4 we address changes in central-bank operations and the increasing role of open market operations. Section 5 considers the main drivers behind these changes, whereas in Section 6 we provide an empirical evaluation of Chinese monetary policy in light of the European experience. In Section 7, we discuss options for Chinese monetary policy based on our empirical results. Finally, Section 8 summarizes our findings and provides policy recommendations for China.

Up to the late 1970s and early 1980s, money markets (as well as the financial sectors in general) in our benchmark countries were typically underdeveloped and highly regulated. Since then, politics – through financial sector deregulation, government debt policy, and de-politicization of monetary policy – has been one of the main determinants of money-market development. We argue that financial deregulation as an ‘active’ or ‘passive’ response of politicians to developments beyond their control, the need to find new and more flexible sources of government borrowing, and the need to establish a forum for effective monetary-policy implementation—go a long way to explain the significant cross-country differences among our benchmark countries in terms of money-market size and structure, as well as the timing and direction of various policy decisions and outcomes. A main observation is also that a policy decision, once taken, cannot easily be reversed, as the development over time may be characterized as a continuous interplay between policy decisions and market outcomes. The development process thus becomes highly path dependent, and largely reflects political ad-hoc decisions, which are often, in themselves, responses to market developments. There are also considerable potential spill-over effects from other policy areas. Therefore, a gradualist approach and ‘controlled’ financial deregulation like in China is difficult, because – from the point of view of the policy purpose–financial market regulations are complementary (doing away with one undermines the purpose of another), and – more generally – ‘controlled’ and ‘deregulated’ are in some sense mutually exclusive. Chinese monetary policy is largely characterized by this type of spill-over effects, and is full of inherent inconsistencies and conflicts of interest, giving rise to a large degree of discretionary, ad hoc policy measures. As a consequence, China will only be able to partially emulate other countries’ experiences, but outcomes will reflect exogenous factors affecting its policy and policy responses to those factors, if anything is to be learned from the benchmark countries we study here, where central banks have often had a decisive influence on money-market development. The (possibly) good news is that – according to historical comparison – China remains at an early stage of the development, in terms of basic ‘meters’ of all the three processes characterizing the path from regulation-based to market-based monetary policy: financial deregulation, market growth, and the intensity of open market operations. The bad news is that the policy tools presently at the authorities’ disposal are increasingly blunt and ineffectual. Some benchmark countries have changed the basic monetary-policy regime one or more times during the period studied (Finland, Greece, Portugal and Sweden are the most obvious examples, excepting the changeover to EMU). Changes in monetary-policy conditions and operations are correspondingly big in these countries. Among the benchmark countries that essentially stuck to the same policy regime (exchange-rate targets, mostly) throughout the 1980–1998 period, some saw less dramatic changes in the indicators used to analyze monetary policy (Austria, Belgium), while in others, the changes were of average magnitude (Netherlands) or comparatively big (Denmark). A few lessons (or policy recommendations) for China directly related to the money market could be the following. • A general recommendation and a clear lesson from the European experience is to focus objectives as well as operative targets of monetary policy. • One part of this increased focus could be increased flexibility of the exchange rate: As explained above, whether the RMB is under-valued or not, the rigid exchange rate (the de facto effects of the modest revaluation and move to a ‘managed float’ in July 2005 remain to be seen) has undermined attempts so far to foment broader and deeper financial markets, not least a functioning money market, and is directly counter-productive to the effectiveness of the PBC's market operations. With the so-far rigid currency regime, the absence of adjustment to capital movements on the exchange rate effectively implies that adjustments are being ‘passed on’ to a domestic financial system which is not developed enough to handle it. A more flexible exchange rate would also stimulate the development of the foreign-exchange market, including a market for FX derivatives linked to the domestic money market. • The banks’ continued lack of de facto independence as economic entities is distorting the financial intermediation process as well as the PBC's own capacity for effectively implementing policy. For market operations to work, there must be a market of independent market participants acting on the basis of market criteria—i.e., the PBC must not be able to use its political clout to force the banks to respond to various measures when in fact they have no economic incentive to do so. The privatization of the state-owned banks may work in the right direction to the extent that the government just retains a small stake in the banks and by that reduces its influence. • Creation of short-to-medium term securities market based on bank liabilities, such as a CD market; this could help banks clean up their balance sheets (instead of piling up liquidity or channeling it into speculative fixed investments), as well as providing alternative investments to drain the money market of excess liquidity. • Create a viable treasury bill (short-term government debt) market; with the present continued weakness of the banking system, it is unlikely that a CD market could function as a benchmark segment for the short end of the debt market. It should be noted that many of these solutions rely on more broad-based institutional reforms to work properly. China is still largely a ‘commando economy’, which – whether that command is explicitly or implicitly exerted – eliminates the proper incentives to reach market clearing outcomes in whatever market. Imbalances will persist without a firmer and more unconditional commitment to market principles.