The Costs and Implications of PBC Sterilization

摘要: Since China revalued its currency against the U.S. dollar by 2.1 percent in July 2005, from RMB 8.27 per US$ to 8.11, has appreciated a further 14 cent about 6.97 (as of May 2008). On trade-weighted basis, however, less than half this amount. Using J.E Morgan's index (broad basis) for RMB, just 6.1 nominal terms between August 2005 and 2008. Although been very gradually appreciating, flexibility promised China's leaders more illusory real, and, importantly, underlying international payment imbalances have continued widen both absolute as fraction GDP. In article, I set out magnitude problem imbalances, summarize techniques used People's Bank sterilize overall balance payments surplus, assess costs benefits PBC's sterilization strategy--both theoretical perspective light experience other East Asian currencies that witnessed large-scale operations past. also consider whether, purpose ensuring satisfactory monetary arrangements 21st century, it is appropriate country size stature delay adjustment means sterilization. International Payments Imbalance period prior 2002, there were few presumptions would appreciate. There had long history devaluations 1960 1994. However, following devaluation 1994 subsequent reforms external value was held stable US$, notably throughout financial crisis 1997-98. Nevertheless, NDF (non-deliverable forward) traded at persistent discount spot (that is, weaker rate around US$) until December 2002 when moved premium first time (Figure 1). same year, errors omissions item shifted negative positive, suggesting change unreported outflows inflows. 2003 2004 current account capital showed marked increases their surpluses. [FIGURE 1 OMITTED] revaluation despite gradual appreciation currencies, low level Chinese causing run increasingly large (current plus private sector account) surpluses payments. The simplest measure capital) surplus increase foreign exchange reserves. (1) 2006, $246 billion or 9.1 GDP, while $249 9.2 GDP (Table 2007, increased $371.8 11.1 GDR Similarly, 2007 $461.7 billion, 13.8 By any standard, these are substantial magnitude, will consequences trading partners well itself. Sterilization Techniques require PBC, central bank, intervene almost daily buy excess on Shanghai market order hold down RMB. Based 250 days purchases exceeded $1.8 day 2007. making purchases, PBC typically credits reserve accounts mainland banks with an equivalent amount which normal course events cause money supply accelerate 2002-03), turn normally lead inflation. …