Recently in China, open market operations designed by the Chinese Federal Reserve bank have been aiming to decrease the money supply. Since the recent Chinese policy changes, China’s benchmark rate has risen as other rates have fallen. Nearly the past two weeks have caused an extraction of almost 560 million Yuan from the market, and had temporarily increased fears of the economy, but it seems that all of the fears are tenuous and mostly baseless. With rates below 3%, direct injection has been bolstered and and foreign inflows have remained steady since January. By the government also keeping the yuan exchange rate back by injecting money, there seems to be possible problems which may ensue.
http://www.reuters.com/article/2013/03/11/markets-china-bonds-idUSL3N0C30RQ20130311
Is the recent round of open market operations a sign that inflation may be overtaking growth in China? If so, is this a temporary problem, or something the Chinese Central Bank will have to deal with for years to come?
Read the finance chapter in B&R!! [Allen, Qian & Qian Ch 14]
As in many developing economies, monetary policy in China is an awkward tool — interest rates are low, so there’s always excess demand. Raising interest rates doesn’t do a thing (except perhaps cut the excess). Small firms (cf. Country Driving have no access to financial markets (= banks). People don’t have access to money market mutual funds (which are short-term bond funds) or other market-interest-rate-based financial products. You don’t borrow money to buy a car or to buy real estate. So on both the supply side and the demand side interest rates don’t matter, or don’t matter much.
Challenge: Given that, how then do you conduct macroeconomic policy?
Addendum: note the topic (current 27 March) on the syllabus.