China and Usa: a Comparison of Their Monetary Policies

University of International Business and Economics chinaw ar and USA A comparison of their pecuniary Policies. Mid- frontier reckon School of International Trade and Economics BY Rebecca Bogiri Professor LIN GUIJIN Beijing, chinaware 2 December 2009 mainland china and USA A comparison of their pecuniary Policies. By Rebecca Bogiri December 2009 Abstract The financial policies of USA and china is analyzed here from the perspective of their implementing bodies, their choice of instruments, and their means of setting their interest wanders.The analysis reveals that there are immense fights between the dickens countries resulting from the nature and form of influence from their respective domestic political systems. The cover concludes that China has a complex political providence that represents a hybrid of private willpower and call down reserve. Therefore unlike the USA, its fiscal policies are subject to political influence. Keywords pecuniary polity pecuniary poli ty instruments Balance Sheet China USA Authors email becky. emailprotected com ContentsPage Abstract .. 1 admission 3 USA Monetary form _or_ system of government . 3 China Monetary policy .. 7 similarity of China and USAs monetary policies 9 Conclusion . 10 References .. 11 1. Introduction Monetary Policy is the process by which the government, central affirm, or monetary authority of a country controls (1) the put out of money, (2) the availability of money, and (3) the interest browse, in order to attain a set of objectives oriented towards the egress and stability of the economy.This paper refers the above theme to two countries China and USA. As such, there are deuce-ace grand objectives. The first is to talk of monetary insurance form _or_ system of government generally as carried out in the USA. The second is to discuss monetary insurance generally as it is carried out in China. The third is to compare and analyze the port monetary constitution is implemented in the two countries. 2. USA Monetary Policy How is the federal official officialeral oblige structured? The provideeral Reserve establishment (called the provide, for short) is the nations central bank.It was established by the feederal Reserve Act1 and consists of the bill of fare of Governors in Washington, D. C. , and twelve catereral Reserve District shores. The Congress structured the provide to be fissiparous within the government. Therefore although the Fed is accountable to the Congress and its goals are set by law, its conduct of monetary policy is insulated from day-to-day political pressures. This reflects the conviction that the people who control the countrys money offer should be self-employed person of the people who frame the governments spending decisions.What makes the Fed fissiparous? Three structural features give the Fed license in its conduct of monetary policy the appointment procedure for Governors, the appointment procedure for Reserve posit chairpersons, and funding. Appointment procedure for GovernorsThe seven Governors on the national Reserve Board are appointed by the President of the United States and confirmed by the Senate. Independence derives from a couple of factors first, the appointments are staggered to reduce the prognosis that a single U. S.President could load the Board with appointees second, their terms of office are 14 old agemuch foresightfuler than elected officials terms. Appointment procedure for Reserve cashbox Presidents Each Reserve jargon President is appointed to a five-year term by that depones Board of Directors, subject to final approval by the Board of Governors. This procedure adds to independence because the Directors of each Reserve Bank are non chosen by politicians but are selected to provide a cross-section of interests within the region, including those of depository institutions, nonfinancial businesses, labor, and the public.FundingThe Fed is structured to be self-suffi cient in the sense that it put togethers its operating expenses primarily from the interest earnings on its portfolio of securities. Therefore, it is independent of Congressional decisions about appropriations. How is the Fed independent within the government? Even though the Fed is independent of Congressional appropriations and administrative control, it is ultimately accountable to Congress and comes under government audit and review. Fed officials report regularly to theCongress on monetary policy, regulatory policy, and a variety of different(a) issues, and they meet with senior Administ dimensionn officials to discuss the Federal Reserves and the federal governments sparing programs. The Fed in addition reports to Congress on its finances. Who makes monetary policy? The Feds FOMC (Federal Open Market Committee) has primary responsibility for conducting monetary policy. The FOMC meets in Washington eightsome times a year and has twelve members the seven members of the Boa rd of Governors, the President of the Federal Reserve Bank of New York, and four of the some other Reserve Bank Presidents, who serve in rotation.The remaining Reserve Bank Presidents contribute to the Committees discussions and delibe proportionalityns. In addition, the Directors of each Reserve Bank contribute to monetary policy by reservation recommendations about the appropriate discount run, which are subject to final approval by the Governors. Objective of Monetary policy Monetary policy has two basic goals to promote maximum sustainable issue and barter and to promote stable prices. These goals are prescribed in a 1977 amendment to the Federal Reserve Act.In the commodious run, the amount of goods and services the economy produces (output) and the number of jobs it generates ( oeuvre) both depend on factors other than monetary policy. These factors take on technology and peoples preferences for saving, risk, and work effort. So, maximum sustainable output and employmen t mean the levels consistent with these factors in the long run. But the economy goes through business cycles in which output and employment are above or below their long-run levels. Even though monetary policy cant locomote either output or employment in the long run, it can affect them in the short run.For example, when demand weakens and theres a recession, the Fed can stimulate the economy temporarily and help push it back toward its long-run level of output by lowering interest rates. Thats why stabilizing the economy, or smoothing out the peaks and valleys in output and employment around their long-run growth pathsis a key short-run objective for the Fed and many other central banks. USA Federal Reserve Balance Sheet ASSETS LIABILITIES Gold and Foreign throw cash Held by public Vault cash Federal Reserve Credit Bank Deposits Loans & Discounts Government Securities separate commendations Source Federal Reserve Bulletin, May 1996. Monetary policy instru ments The Federal Reserve has three instruments for controlling the money supply. They are 1. Open Market Operations 2. The discount rate and 3. The required shyness ratio. When using Open market operations, the Fed bargain fors or sells government securities to affect the level of the money supply. For example, if the Fed wishes to increase the money supply by $2 million, it will purchase government securities worth $ 2 million. The Feds assets increase by $ 2 million under the securities heading. In order to buy off for the government security, the Fed writes a ticking on itself.In return for the bond, the seller receives a check instructing the Fed to conciliate the seller $ 2 million. The seller then(prenominal) takes the check to his bank, which attributes the depositor with $ 2 million, and then deposits the check at the Fed. The bank has an account with the Fed, which is now credited with $ 2 million. Thus the Feds liabilities increase by $ 2 million under the heading of bank deposits, as the commercial bank has just increased its militia by $ 2 million which are held by the first exemplar as a deposit at the Fed. Another monetary policy instrument utilize to affect the level of the money supply is the Discount rate, which is the interest rate charged by the Fed to banks that strike from it to temporary needs for reserves.Increasing the discount rate discourages banks from take ining from the Fed, while lowering the rate encourages banks to borrow from the Fed and thus increase the money supply. The required reserve ratio refers to the office of total deposits that the Fed requires individual financial intermediaries to keep at the Fed as reserves. The significance of the required reserve ratio is that it affects the money multiplier, and thus the level of the money supply. For example, if the Fed wants to increase the money supply, it can do so by reducing the required reserve ratio. Because there are now less reserves and to a greater ext ent money is available for the banks to be able to meet their customers demand for cash. This increases the money multiplier, which also has a positive effect on the level of the money supply.Required reserves do not pay any interest, so increases in the required reserve ration has undesirable side cause on bank profits. Open market operations are nearly always the favored incision of choice by the Fed. The Fed Open Market Operations in 2008 summarizes all monetary policies and tools used by the Fed for that year. The two tables below shows the changes in the federal funds target rate, and the primary credit rate, and the interest paid on the required reserves and excess reserve balance.. These were operational measures taken by the Fed to influence the Federal funds rate. It is evident that the Fed rapidly and continually decreased the federal funds rate and the primary credit rate throughout 2008.Furthermore, on October 8th 2008 the Fed started to pay interest on despository ins titutions required and excess reserves balances as authorized to under the Financial function regulatory Relief Act2. pic pic 3. China Monetary Policy Body in charge of Monetary Policy Monetary policy in China is conducted by the Peoples Bank of China. Article 12 of the natural law of the People? s Republic ofChinaon the People? s Bank of China provides the People? s Bank of China is to establish a monetary policy committee, whose responsibilities, composition and working(a) procedures shall be prescribed by the State Council and shall be filed to the Standing Committee of the National People? s Congress. The Monetary Policy Committee shall play an important role in macroeconomic management and in the making and adjustment of monetary policy. Rules on Monetary Policy Committee of the People? s Bank of China stipulates that the Monetary Policy Committee is a consultative body for the making of monetary policy by the PBC, whose responsibility is to advise on the formulation and adj ustment of monetary policy and policy targets for a certain period, application of monetary policy instrument, major monetary policy measures and the coordination between monetary policy and other macroeconomic policies. The Committee plays its advisory role on the basis of comprehensive research on macroeconomic situations and the macro targets set by the government. The Monetary Policy Committee is composed of the PBC? Governor and two Deputy Governors, a Deputy Secretary-General of the State Council, a Vice Minister of the State Development and remedy Commission, a Vice Finance Minister, the Administrator of the State Administration of Foreign Exchange, the Chairman of China Banking Regulatory Commission, the Chairman of China Securities Regulatory Commission, the Chairman of China Insurance Regulatory Commission, the Commissioner of National Bureau of Statistics, the President of the China Association of Banks and an expert from the academia. The Monetary Policy Committee perfo rms its functions through its regular quarterly meeting. An ad hoc meeting may be held if it is proposed by the Chairman or endorsed by more than one-third of the members of the Monetary Policy Committee. Objective of Monetary policy The main objective of the Chinese monetary policy is to notice the stability of the value of the currency (the Renminbi), and thereby to promote economic growth. Peoples Bank of China Balance Sheet ASSETS LIABILITIES Credits to FI Deposits of FI Central Bank Reserves Excess Reserves Foreign Exchange Reserves Central Bank Bills Securities Deposits of Treasury Currency in Circulation Source AE502 Macroeconomic Analysis Monetary Policy Instruments The Peoples Bank of China in conducting Monetary policy has several instruments at its disposal which include 1. The reserve requirement ratio 2. The Central Bank base interest rate 3. Rediscounting 4. Central Bank Lending 5. Open Market Operations 6.Other policy instruments as undertake by the S tate Council In essence, the monetary instruments listed above correspond to the descriptions given under the Feds monetary policy heading. However, the main tool of choice for the PBC is the reserve requirement ratio. For example, in the PBC 2008 one-year base on Monetary Policy it was reported that in order to sterilize excess liquidity in the first half of 2008, the reserve requirement ratio was decreased cumulatively by 3 percentage points on 5 occasions. Furthermore, a lower required reserve ratio was applied to rural credit cooperatives (RCCs) and financial institutions in the quake-hit areas.Furthermore, in the second half of 2008 with the heightened international turmoil and in order to check up on ample liquidity in the banking system, the PBC further reduced the required reserve ration of financial institutions on another four occasions resulting in a cumulative decrease of 2 percentage points for erect financial institutions, and a cumulative decrease of 4 percentage points for smaller financial institutions. According to PBC calculations, by the end of 2008 a total of 800 billion yuan of liquidity was released into the economy. The choice of the reserve requirement ratio as the mail policy instrument is not coincidental to China which runs a high accepted account surplus. There is a large and growing demand for the RMB, and to maintain the RMB at the desired level the PBC issues RMB to meet this demand thereby increasing the money circulating in China.To keep inflation and economic growth under control, the PBC sterilizes its foreign exchange market interventions by buying back some of the RMB it issued to buy US dollar. In particular, it does so by selling low yield government securities to state-owned banks. So far, the banks birth been able to absorb those low yield bonds in part because the interest rates paid on them bank deposits are also maintained at artificially low rates. Nonetheless, the increases in foreign reserves are not fully neutralized. Over the last five years broad money supply in China has been growing at above 15% per annum while real economic growth has averaged about 10. 5%. 3 Furthermore unlike more developed market economies, China is reluctant to stomach domestic interest rates to slow its domestic growth.Doing so might mean attracting more ceiling inflows, which would in turn, require further money issuance to stabilize the exchange rate. That is precisely why the PBC rather changes the reserve requirement ratio on an ongoing basis to control the expansion of money and credit. 4. relation of China and USAs monetary policies There are three main differences between China and the United States where monetary policy is concerned independence of the monetary policy implementing body, choice of instruments to use in implementing monetary policy, and direct or indirect means of setting interest rates to effect monetary policy. Furthermore, these three differences are inter-related and country s pecific.The first major difference between the Federal Reserve System (the Fed) and the Peoples Bank of China (PBC) concerns their independence from national politics. The intention of Congress when designing the Federal Reserve Act was to keep politics out of monetary politics. The Fed is totally independent of other branches and agencies of the government. Furthermore, it is self financed and wherefore is not subject to the congressional budgetary process. On the other hand, the PBC is not independent from national politics in China. The PBC reports directly to the State Council which serves as Chinas cabinet as well as its highest executive body. Moreover, monetary policy in China is aimed at limiting the cargo deck of the renminbi (RMB), while eeping economic growth at a sustainable pace and inflation under control plus preserving a fragile banking system. The Fed in contrast implements a monetary policy that has a dual objective of maximum employment and price stability. The second difference regards the choice of the monetary policy instruments used by the Fed as opposed to the PBC. The choice of instruments used in implementing monetary is basically the same, except that the PBC has the an additional instrument namely additional instruments as specified by the State Council. It is therefore no surprise that this extra instrument arises from the lack of independence on the part of the PBC.The third difference between the Fed and the PBC lies in the way they set the interest rates. The Fed sets its federal funds rate indirectly by setting a specified target rate and then using the the tools of monetary policy (open market operations, discount window lending, and reserve requirements) to achieve that target rate. As a result, the changes in the federal fund rates trigger a chain of events that affect other short term interest rates, long term interest rates, the amount of money and credit in the economy, plus other macro-economic variables such as empl oyment, growth and the prices of goods and services. In contrast, the PBC has a direct influence on its interest rate because of the extra instrument described above.Because there is provision for other policy instruments as specified by State Council, this allows the PBC to set interest rates directly, and thus have a direct impact on the its balance sheet. 5. Conclusion There are major differences in monetary policy and central banking in China and the USA. China has a complex political economy that represents a hybrid of private ownership and state control. Therefore, the PBCs monetary policies, choice of instruments and orders of implementation are quite different from that of the Fed. Monetary policy in China aims at curbing the appreciation of the RMB while keeping economic growth at a sustainable pace, inflation under control, and preserving a fragile banking system. This is contrasted with the Feds monetary policy with the dual objective of maximum employment and price stab ility.Different monetary policy objectives, coupled with the degree of political independence on the part of the Fed and the PBC greatly influence the choice of instruments used and the method of implementing monetary policy in the two respective countries. 6. References Federal Reserve Bank of New York municipal Open Market Operations During 2008 Federal Reserve Bank of New York Annual Report domestic help Open Market Operations during 2008 Federal Reserve Statistical Release 19 November 2009 Ian Sheldon, US-China Trade Policy Who gains from a rise in the Yuan? at http//aede. osu. edu/programs/Anderson/trade Luc de Wulf and David Goldsbrough, The Evolving Role of Monetary Policy in China, IMF Staff text file WP/04/125Michael Moskow and Cathy Lemieux China up close Understanding the Chinese economy and financial system, at www. chigacofed. org Peoples Bank of China Monetary Policy Annual Report 2008 Peter Stella, The Federal Reserve System Balance Sheet What Happened and Why it matters IMF Staff Papers WP/09/120 Financial Services Regulatory Relief Act 2006 (USA) Federal Reserve Act 1913 (USA) Law of the Peoples Republic of China on the Peoples Bank of China 1995 (China) http//www. frbsf. org/publications/federalreserve/monetary/structure. html http//www. pbc. gov. cn/english/huobizhengce/MPC. asp http//en. wikipedia. org/wiki/Monetary_policy 1 1913 2 2006 3 China close up (2008)