Chinese banks generate large profits and have relatively low nonperforming loans. However, good financial performance does not, in itself, guarantee that banks efficiently intermediate the economy’s financial resources. This paper first examines how efficient Chinese banks are in financial intermediation, using the stochastic production frontier approach. Quality of loans are controlled for by focusing on net loans and correcting for nonperforming loans; Hong Kong SAR banks are included in the sample to have a more universally representative production frontier. The results suggest that Chinese banks indeed became more efficient during 2001–07. Nevertheless, a majority of banks remain quite inefficient, including several large state owned banks and many city banks. Large banks tend to hoard deposits and operate beyond the point of diminishing returns to scale, while smaller banks operate at increasing returns to scale. This suggests that reallocating deposits from large to smaller banks would increase overall efficiency. The paper finds no significant correlation between bank efficiency and profitability. Possible factors leading to large profits in the banking system, despite wide-spread inefficiencies, are low deposit interest rates, large interest margins, and high market concentration. Moving to indirect monetary policy and deepening capital markets to channel some of the savings to productive investment would help improve the efficiency of financial intermediation. This may spur loan growth, however, which will need to be handled with monetary policy and regulatory/supervisory tools.

What might interest rate liberalization do to intermediation and the cost of capital in China? China’s most binding interest rate control is a ceiling on the deposit rate, although lending rates are also regulated. Through case studies and model-based simulations, we find that liberalization will likely result in higher interest rates, discourage marginal investment, improve the effectiveness of intermediation and monetary transmission, and enhance the financial access of underserved sectors. This can occur without any major disruption. International experience suggests, however, that achieving these benefits without unnecessary instability, requires vigilant supervision, governance, and monetary policy, and a flexible policy toolkit.

In China, regional disparities are important. We examine the difference in the sensitivity of investment to cash flow between firms in inland regions and those in coastal regions. By using the financial data of Chinese listed firms, we found that firms in inland regions rely more on their internal funds in terms of their investment activities than those in coastal regions and that the sensitivity gap between inland and coastal firms widened in the recent contractionary monetary policy period. This suggests that firms in inland regions are harder to obtain outside funds due to unfavorable social and economic environments for inland firms. Our findings suggest that capital markets in China respond rationally to the potential impact of regional disparities on a firm’s performance.

In recent years China has faced an increasing trilemma - how to pursue an independent domestic monetary policy and limit exchange rate flexibility, while at the same time facing large and growing international capital flows. This paper analyzes the impact of the trilemma on China's monetary policy as the country liberalizes its goods and financial markets and integrates with the world economy. It shows how China has sought to insulate its reserve money from the effects of balance of payments inflows by sterilizing through the issuance of central bank liabilities. However, we report empirical results indicating that sterilization dropped precipitously in 2006 in the face of the ongoing massive buildup of international reserves, leading to a surge in reserve money growth. We estimate a vector error correction model linking the surge in China's reserve money to broad money, real GDP, and the price level. We use this model to explore the inflationary implications of different policy scenarios. Under a scenario of continued rapid reserve money growth (consistent with limited sterilization of foreign exchange reserve accumulation) and strong economic growth, the model predicts a rapid increase in inflation. A model simulation using an extension of the framework that incorporates recent increases in bank reserve requirements also implies a rapid rise in inflation. By contrast, model simulations incorporating a sharp slowdown in economic growth lead to less inflation pressure even with a substantial buildup in international reserves.

The global financial crisis is hitting China hard with great adversity. In response, China start to formulated the plan for dealing with the financial crisis and its possible fallout in June 2008 when China was in the critical stage of putting up the Olympic Games. The Chinese leadership judges the crisis is going to be a serious disaster but not as bad as the great depression of the 1930s. An America-type crisis is unlikely to happen in the country and the main threat would be the Chinese real sector being dragged down under, which in turn sparks a crisis in the financial sector. China’s strategy for combating the crisis therefore is to deal with the immediate crisis effects in the real economy in the first place, and looks for opportunities in the meantime. The overwhelming emphasis is placed on expanding domestic demand to fuel growth. Following this strategy, China has rolled out a comprehensive package of combating measures. The fiscal expansion hit the headlines with extensive government financial support for infrastructure and public service projects. Yet the Chinese monetary stimulus is actually more powerful. The stance of Chinese monetary policy has changed from being precautionary against inflation with flexibility to appropriate easing to promote growth. After several rounds of rate cuts, the Chinese version of quantitative easing takes the central stage. In China’s battle with the financial crisis, the monetary stimulus is playing a leading role at the moment. The international dimensions of China’s monetary policy typify how China turns a crisis into a world of opportunity. China has taken a conservative approach to managing her reserves in which the huge international reserves are taken as self insurance rather than an avenue for international leverage. Within this framework and if safety of these foreign assets can be assured, China can provide finance to countries in crisis through international financial organisations. In addition to the Panda Bonds, the chief way for China to make funding contribution is through IMF. For this matter, China supports the motion to increase the IMF’s lending capacity and would buy the bonds it issues. China is actively calling for reform of international financial architecture. Chinese advisers have publically argued that the increase in China’s funding contribution has to be paralleled by an increase in China’s profile in the power structure in the IMF. In many occasions, China has also acted as spokesman of the emerging and developing economies by making cases for increasing their say in world financial affairs. But on the whole, China has been cautious not to committing herself too much as she knows probably she has little to gain from international policy coordination. Against this backdrop, China has chosen to focus on regional financial cooperation proactively and considerable progress has been made in this area. China’s dealing with the current financial crisis is unassuming. What she has done is down-to-earth common sense. However, the Chinese approach is shown signs of working. Despite the early success of crisis handling, there remain fundamental problems in China’s structure of economic growth. How to redress structural imbalances in the economy, to boost domestic demand, to calm down the property market and, above all, to create millions of jobs, are still the major huge challenges China is facing.

We study the effects of Chinese monetary policy shocks on China's major trading partners in East Asia by estimating structural vector autoregressive (SVAR) models for six economies in the region. We find that a monetary expansion in Mainland China leads to an increase in real GDP (temporary) and the price level (permanent) in a number of economies in our sample, most notably in Hong Kong and the Philippines. The impact could result from intertemporal substitution present in a general equilibrium framework which allows for positive domestic impacts of foreign monetary expansions. Our results emphasize the growing importance of China for its neighboring economies and the significance of Chinese shocks for the design of monetary policy in Asian economies.

Chinese authorities have traditionally relied mainly on administrative and quantitative measures in conducting monetary policy, with interest rates playing a less prominent role. Additional support for this view resides in a number of earlier studies that have found that the impact of interest rates on the real economy has been miniscule. However, taking into account numerous reforms in the financial sector and more widely in the Chinese economy, interest rates may have gained some influence in the last few years. It is important to study the effectiveness of interest rates also in light of future reforms of the monetary policy tools in China. Whereas administrative policy measures were effective in guiding the behaviour of state-owned enterprises, the authorities may need to increase the use of more market-oriented monetary policy tools as the share of the economy in private and foreign ownership grows. We use a vector error correction model to study, within a credit demand framework, whether the impact of interest rates in China has become stronger over the last decade. Our results suggest that loan demand has indeed become more dependent on interest rates, albeit the channel from interest rate to the real economy is still weak.

One argument for floating the Chinese renminbi (RMB) is to insulate China's monetary policy from the US effect. However, we note that both theoretical considerations and empirical results do not offer a definite answer on the link between exchange rate arrangement and policy dependence. We examine the empirical relevance of the argument by analyzing the interactions between the Chinese and US interest rates. Our empirical results, which appear robust to various assumptions of data persistence, suggest that the US effect on the Chinese interest rate is quite weak. Apparently, even with its de facto peg to the US dollar, China has alternative measures to retain its policy independence and de-link its interest rates from the US rate. In other words, the argument for a flexible RMB to insulate China's monetary policy from the US effect is not substantiated by the observed interest rate interactions.

随着我国经济开放度的提高，内部均衡和外部均衡目标相互冲突的情况越来越多。本文以西方20世纪50年代开始发展起来的政策配合理论为工具，分析了亚洲金融危机后我国政策配合的实际情况与效果，得出：在我国汇率事实上是固定汇率的情况下，稳健的货币政策配合积极的财政政策基本实现了调节内外部失衡的目标。最后，针对政策配合中存在的问题，提出应让汇率杠杆发挥更大作用，以增强货币政策自主性，减少对财政政策依赖。 Abstract: Following the increase of openness in China, the conflicts between the targets of interior equilibrium and exterior equilibrium are more and more frequent. With the instrument of the theory of policy mix which developed since 1950s’ in the Occident, we analyze the practice and effect of policy mix in China after the Asian financial crisis. Under the condition of virtual fixed foreign exchange regime, we conclude that the China’s policy mix between the prudent monetary policy and the proactive fiscal policy realize the most task of regulation of interior-exterior disequilibrium. In the end, according to the problem during the policy mix, we suggest that we should let foreign exchange lever play more role to increase the independence of monetary policy, decrease the dependence on fiscal policy.

中央银行独立性问题在现代宏观经济研究特别是货币政策研究中备受关注，其与宏观经济指标的相互作用很大程度上决定着货币政策的运行效果。就此问题，本文首先介绍了西方学者对央行独立性的不同定义及研究的理论基础，随后从理论和实证两个角度分析中央银行独立性同宏观经济运行之间的关系，最后本文得出如下结论：中央银行独立性与通货膨胀之间的关系比较明确，与其他变量之间的关系仍不能明确界定；中央银行独立性的提升确实能有效降低通货膨胀率，但是抑制通货膨胀不能单独地成为支持中央银行独立性的理论基础；是否提高中央银行独立性应该结合其与物价、就业、经济增长的关系； The Central Bank Independent (CBI) issue has drawn more attention in macroeconomic research, especially is in the monetary policy research .To a large extent, it’s interaction with macroeconomic goals (price, economic growth, employment) mutually plays a remarkable role on the effect of monetary policy. On this question, this article first introduced the western scholar’s different definition on central bank independent and the theoretical basis of it. Then, we analyses the relationship between Central Bank independence and macroscopic economic performance theoretical and empirical angle. Finally we drawn draws the following conclusions: The relations Between the Central Bank independence and the inflation is quite explicit, but we are not clear about it’s relation with other variables such as growth、employment、deficits; Increasing Central Bank independent can effectively reduce the inflation rate, but “cut down” inflation cannot alone become the support for Central Bank independence; Whether or not to enhances the Central Bank independence should take in account it’s relations with the price, the employment, the economy grows; we should care about the “stationary” of variable when dealing with time-series data, otherwise the conclusion maybe less in accuracy and credibility;