Zhou Xiaochuan on Monetary Policy in China

Zhou Xiaochuan explains the PBoC's multiple objectives. Balance of payments discussion is below.

IMF: Michel Camdessus Central Banking Lecture, Managing Multi-Objective Monetary Policy: From the Perspective of Transitioning Chinese Economy
The single objective of maintaining price stability is an enviable arrangement, as it is simple, easy to measure and communicate. However, it is not yet realistic for China at this stage. For a long time, the annual objectives of the PBoC mandated by the Chinese government have been maintaining price stability, boosting economic growth, promoting employment, and broadly maintaining balance of payments. The feature of a transition economy also requires the PBoC to promote reform and opening up as well as financial market development. Reform and financial market development will help achieve financial stability and economic transition from a dynamic and medium-to-long term perspective, and transition will in turn support a more efficient and stable economy. The PBoC attaches high priority to price stability, which is an objective of most central banks. Boosting economic growth and promoting employment are broadly overlapping goals and some central banks also have similar objectives. However, the PBoC has some distinct roles, which include promoting reform and opening up, developing financial markets, and maintaining balance of payments, and the PBoC also works closely with other government agencies. Why does the PBoC have these objectives? Why the central bank, not the ministry of finance?

...Why does the PBoC pay attention to balance of payments? In fact, for all emerging market economies, balance of payments, capital flows, exchange rate and foreign exchange reserves are all key factors affecting macro economy and monetary policy. It is not surprising that central banks from emerging market economies pay close attention to balance of payments. The IMF knows better about this. In addition, transition economies have their own unique features. Most of them experienced the collapse of international trade and sharp deterioration in balance of payments due to severe distortions typically seen in price, trade and exchange rate polices under planned economy.

During transition to a market economy, China learned from the outward-looking development strategy of East Asian economies. This development strategy contributed to the reform and opening up in various sectors of the Chinese economy. It also increased China’s dependence on international trade and foreign capitals. As a result, balance of payments largely affected the central bank’s monetary policy, money supply and price stability objective. Therefore, the PBoC must pay attention to balance of payments, and needs to assume accordingly roles such as managing the exchange rate, foreign exchange market, foreign exchange reserves, gold reserves, and balance of payments statistics. The public finance was in an extremely difficult situation during the early and middle stage of the transition, as there were sizable explicit and implicit fiscal losses, and understandably did not actively take care of such issues as banking reform, exchange rate and balance of payments. China’s developments over the years have shown that both domestic and external demand has undergone adjustments in the right direction. China has also weathered the Asian financial crisis, indicating that it is right for the PBoC to pay attention to balance of payments.

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