Changing Money Market and Monetary Policy Operations in China: an institutional perspective

This paper uses an institutional perspective to examine the changing monetary policy operations in China since the 1978 reform. It shows that the establishment of money markets has enabled the central bank to shift its policy approach of direct control over credits to a set of indirect monetary tools. Under the constraint of exchange rate stability and other institutional factors, the effectiveness of these indirect tools is limited. Establishing an interbank money market policy rate through SHIBOR will provide a means of signaling the cost of funds to banks and the public. Its success in China is conditional on improved corporate governance and the competitive structure of banks, increased flexibility in its exchange rate determination, and a more cost-conscious state sector.