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The following OECD assessment and recommendations summarise chapter 2 of the Economic Survey of China published on 2 February 2010.
Further modernisation of the monetary policy framework is warranted
China’s monetary policy framework has gradually moved away from a planned administrative system to a more market-based regime, with money growth as the main intermediate target. As part of this transition, some interest rates have been liberalised, making them more responsive to market signals, and the tools of monetary policy have been modernised. The central bank now has considerable control over short-term interest rates in the interbank market and more influence over longer-term rates through the term structure. Going forward, the central bank’s operational framework needs to place less emphasis on quantity-based liquidity controls and more on interest rate changes. Its benchmark commercial bank lending and deposit rates are losing relevance in the conduct of monetary policy and ought to be progressively phased out. The banking sector has also undergone significant reform and the economy has become far more responsive to market-based policy measures: investment at the firm level is more sensitive to interest rate movements and changes in aggregate demand pressures exert a stronger influence on inflation. Hence, the transmission mechanism has become more effective in China and monetary policy can play a greater role in fostering stability. However, the current exchange rate regime limits the effectiveness of this channel by preventing the value of the currency from adjusting to offset macro shocks. Allowing greater exchange rate flexibility and putting more weight on an inflation objective – while keeping a vigilant eye on asset prices – would offer the central bank more scope to tailor monetary policy to domestic macroeconomic conditions and reduce the costs and risks of sterilising foreign reserve inflows. Besides, real exchange rate appreciation is to be expected in any event over the medium run in an economy that is catching up rapidly.
Nominal and real exchange rates and foreign exchange reserves
Source: CEIC, OECD and BIS.
How to obtain this publication
The complete edition of the Economic Survey of China is available from:
The Policy Brief (pdf format) can be downloaded in English. It contains the OECD assessment and recommendations.
For further information please contact the China Desk at the OECD Economics Department at firstname.lastname@example.org.
The OECD Secretariat's report was prepared by Richard Herd, Samuel Hill and Yu-Wei Hu under the supervision of Vincent Koen. Research assistance was provided by Thomas Chalaux.