Bank of Finland’s Institute for Economies in Transition (BOFIT) held a high-level international workshop on 16–17 May on the subject of China’s monetary and exchange rate policies. Workshop participants represented both central banks and the academic world. The topic of interest was approached from numerous perspectives, as would be expected in light of the complexities involved.
Some of the sessions focused on the transmission of Chinese monetary policy and its domestic objectives. Because the Chinese authorities regulate eg capital flows and banking in a variety of ways, it is not obvious how monetary policy eg impacts bank lending. Moreover, the much of financing in China is intermediated outside the banking system, which further complicates the measurement of monetary policy effects. Ms Xuechun Zhang, from the People’s Bank of China (the central bank), described the financial indicators developed at the central bank. He noted that, while the ultimate goal is liberalization of the financial markets, the central bank will for the present have to rely more eg on bank-specific reserve requirements in order to control the growth of lending.
Some papers dealt with the external value of China’s currency, the yuan. Although many felt that the yuan is somewhat undervalued vis-à-vis its equilibrium value, the presentation of Yin-Wong Cheung (University of California, Santa Cruz) showed how sensitive the various equilibrium-value metrics are to revisions of the data. In the ensuing discussion, it was emphasised that, because of the structure of China’s foreign trade, changes in exchange rates have only minor effects on the foreign trade balance.
The papers presented at the Workshop will be published in the BOFIT Discussion Paper series.