The introduction of a weekly issue of central bank bills by the People's Bank of China marks an important stage in the development of monetary management on the Mainland.
I wonder whether observers of monetary management in Mainland China have seen a notice (number 6 of 2003) concerning open market operations issued by the People's Bank of China on 28 April 2003. For those who have not, I recommend that they visit the relevant website (www.chinamoney.com.cn) and read that notice, and that they perhaps visit this site regularly for other, future notices. Notice number 6 of 2003 announced an important change in the use of monetary instruments in monetary management.
The People's Bank of China has, for the time being, stopped the twice-weekly re-purchase operations that made use mainly of treasury bonds. It has replaced these by a weekly issue of central bank bills. Indeed the issue of central bank bills by the People's Bank of China looks like becoming a continuous feature with the introduction of the programme of weekly issues of bills. This started on 22 April 2003 with RMB5 billion of six-month bills and was followed on 29 April and 6 May by the issue of RMB10 billion of three-month bills on each occasion. Further issues, including RMB10 billion of three-month bills and another RMB10 billion of six-month bills, were offered this Tuesday (13 May).
I consider this change to be a significant move towards sophistication in monetary management on the Mainland. As I pointed out in my Viewpoint article on 20 February, the large balance of payments surplus in the current account and the net inflow of foreign direct investments will involve, with exchange controls, a corresponding large capital outflow. This takes the form of the rapid accumulation of foreign reserves that we have all witnessed in recent years. This will further involve the injection or creation of RMB base money in the form of clearing balances in the RMB clearing accounts of banks held with the People's Bank of China. Sterilisation of the base money so created is necessary if interbank interest rates are to be maintained at particular levels, in accordance with monetary policy, however defined. This could be done, I thought in the case of the Mainland, through the disposal of assets on the balance sheet of the central bank. These include, for example, government debt and loans to banks. In any case, loans to banks are undesirable as they would involve the dependence of commercial banks on central bank funding. But obviously when there are prospects that these assets are being exhausted (I have no idea though whether this is the case), or when other considerations preclude pursuing this to the full extent, the alternative is to create a different form of central bank liability to sterilise the clearing balance. This I believe is, or is at least part of, the background to the introduction of the central bank bills programme last month by the People's Bank of China.
This technical story is very encouraging, not just in terms of the increasing sophistication in monetary management on the Mainland, which augurs well for the further development and possible liberalisation of the RMB money market, but also in the very high degree of transparency with which all this is being organised. But there is, as always, room for further improvement. As I see it, there are two desirable objectives - the development of the money market and the creation of an effective tool for monetary sterilisation. Flexibility in deciding not until, say, a week before what maturity of paper to be issued and what amount is of course helpful, particularly when sterilisation is the more pressing objective. But the market would like as much information on the central bank bills programme as possible in order to plan ahead, in terms, for example of managing maturity mismatches. The thing to do may be to fix the weekly programme and to fine-tune monetary conditions through rather more frequent money market operations of the type carried out daily by other central banks engaging in discretionary monetary management.
Incidentally, it may be that the transparency in this market is a little overdone, in that the successful bidders and the amounts that they bid for in the primary issue of the central bank bills are also announced. At this stage of market development when the degree of competition in the interbank market for funds is not as high as in the monetary systems of other jurisdictions, the disclosure of the information does little harm to the commercial banks concerned. However, in the fullness of time, the People's Bank of China would probably wish to step back from that market and play the rather more leveraged and distant central banking role similar to those of other central banks. The interbank market will then correspondingly become more competitive, to the extent that the information may become a matter of concern on grounds of competitive fairness.
Joseph Yam
15 May 2003
Related Viewpoint Article:
Sterilisation of Central Bank Transactions, 20 February 2003
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