China's Central Bank Sterilized Intervention Validity Research

Since 1994, double surpluses (currency-account surplus and capital-account surplus) have appeared in the balance of payments of China. With the pegged exchange rate and the system of settling and selling foreign exchange, foreign assets (foreign exchange) of the People's Bank of China (PBC) and money supply have been increasing due to the double surpluses. In order to guarantee the money supply target and maintain the independence of monetary policy, PBC must take some measures to sterilize the passively expanded money supply. This article estimates a reaction function for the central bank by quarterly data in different periods from 1996 to 2007 on the base of the Monetary Approach to Balance of Payments (MABP). The study focuses on the short-run impact of sterilized intervention on monetary policy and money supply. The empirical results suggest that sterilized intervention of PBC neutralized the capital inflows at a large extent in the last more than ten years. The sterilized intervention will be more effective with the deeper financial reform and the development of open-market operation. This article sheds light on the independence of the monetary policy of PBC.Major contents and options in the article include the following five aspects. First, introduced the background of the studying and the main findings of academia; in the second chapter, mainly reversed the sterilized policy of rediscount, the rate of legal reserves and open market operation; in the third part, using the quarterly data in 1996-2007 and the software of EViews5.0, the article regressed the variable of PBC's domestic and foreign assets, GDP, the government deficit and so on. The results of the analysis show that the sterilized intervention by PBC neutralized the capital inflows at a large extent; in the fourth part of the article, based on demonstration of the above parts, analyzed the reason why the money supply grows so fast; in the fifth chapter of the article, posed some suggestions and pointed out the following research direction.