Considerable attention has been devoted to China's monetary policy and the benefits that greater exchange rate flexibility would bring-in particular by allowing a truly independent monetary policy. But the debate should not overshadow the significant modernization that has already taken place in how the People's Bank of China (PBC) conducts monetary policy. A recent workshop, organized at the invitation of the PBC, discussed options for the central bank to formalize its monetary policy framework and improve its monetary operations, drawing on central bank expertise from around the world.
Since it began performing the functions of a central bank in 1984, the PBC has moved gradually to a monetary strategy anchored on intermediate monetary targets. The PBC aims to keep inflation low and growth high, and it announces targets for the growth of narrow and broad monetary aggregates-M1 and M2-in line with these objectives. The PBC has also developed an array of monetary policy instruments similar to those used by the most advanced central banks. In particular, it uses reserve requirements and open market operations, including to sterilize foreign exchange inflows. The use of open market operations has been made possible, in turn, by the development of nationwide foreign exchange and money markets.
China's monetary policy framework appears broadly appropriate at this stage of its economic and financial market development but, over time, its effectiveness may diminish as the economy's sophistication increases. With this in mind, the PBC asked the IMF to organize a workshop in the context of the Joint China-IMF Training Program. The workshop, Determining the Intermediate Target for Monetary Policy:
Practical Issues, sought to distill best practices and discuss their relevance for China. Experts from the central banks of Israel and Chile and from the European Central Bank (ECB) reviewed the building blocks needed for a robust monetary policy decisionmaking process in an economy moving toward a market-based monetary framework, while IMF and PBC experts discussed China's monetary policymaking and the challenges ahead.
In addressing how monetary management is handled in a country with an open capital account and large capital inflows, Barry Topf (Bank of Israel) observed that efforts to pursue an independent monetary policy while simultaneously maintaining a...