A Research On China's Sterilized Intervention In The Foreign Exchange Market

The stabilization of exchange-rate plays a important role in the macro-economy operation, economic increase and employment, etc. of a country. Since Bretton Woods System collapse 1973, in order to stabilize exchange-rate, western countries have intervened in the foreign exchange markets in various degree. The interventions of these countries are always sterilized. Since the reform of China's foreign exchange system 1994, People's Bank of China (PBC, China's central bank) has always been intervening in the foreign exchange market. Along with the reforming and opening-up, The level of PBC's intervention becomes higher and higher. However, there are a lot of problems and defects in the operation of PBC's sterilized intervention. Especially after joining in WTO, how to solve these problems and defects, and how to do sterilized intervention operation better become essential in the reform of China's foreign exchange system which will soon be faced with. It is also plays a important role in the reforming and opening-up and economic development.On the basis of the comparison of the effect of non-sterilized and sterilized interventions, this paper has discussed channels (or models) through which sterilized intervention have an effect in exchange-rate: portfolio-balance channel, signaling channel, noise trader channel, microstructure of financial markets and secrecy puzzle, etc. (the portfolio-balance channel is discussed most dedailedly) Additionally, this paper has reviewed the practice and summarized the features and existing problems of PBC's sterilized intervention. On this basis and according to domestic and international data, the author used the means of regression analysis to analyze the applicability of the portfolio-balance theory in China and the effect of PBC's sterilized intervention, and then explored the essential reasons for the conclusions of the regressions. In the final section of this paper, according to the existing problems and defects of China's sterilized intervention , the author put forward some policy suggestions for reforming and improving.