China's Foreign Exchange Write-off Practice And Impact Of Monetary Policy Independence

Since the year 2000, the "double surplus" of China's international balance of payments has been intensifying. That means the growth of foreign exchange reserves has been sharply speeding. Meanwhile, the money supply has also been growing, and pressures of inflation has highlighted. In order to stabilize the RMB exchange rate and inhibit inflation, the central bank adopted a series of measures to sterilize foreign exchange, such as open market operations, changes in the rate of required reserves, and central bank discount rate etc. All these aim to offset the impacts that foreign exchange intervention brought on money supply. However, the persistence of intervention and negative effects of it has given the alarm.Based on the general theories of sterilized intervention in foreign exchange, this paper tries on analyzing this subject from the practice in sterilizing foreign exchange of China and its impacts on monetary policy independence. Firstly, this paper analyzes the passive background, the practice, the short-term effectiveness and the non-sustainability of China's sterilized intervention in foreign exchange, and concludes that sterilized intervention in foreign exchange is only an operation in short term, and the long-term adjustments of macro-economy lie on flexible interest rate policy and exchange rate policy.Secondly, this paper analyzes impacts that sterilized intervention in foreign exchange brought on monetary policy independence from three aspects as follows: the passive growth of money supply happened with sterilized intervention in foreign exchange, the conflicts between interest rate policy and the sterilized intervention in foreign exchange, and the indirect effects on monetary policy from sterilized intervention. It found that: the contradictions between sterilized intervention in foreign exchange and the independence of our monetary policy, reflects the dilemma of exchange rate and currency supply as dual-name anchor in our monetary policy.Finally, the paper gives some suggestions such as the exchange rate system reform, foreign exchange reserve management and monetary policy objectives of reform, market development and innovation of offset tools to improve the effect of the sterilized intervention and reduce monetary policy inherent contradictions.It shows non-sustainability of sterilized intervention in foreign exchange and interference with monetary policy is the paradox between fixed- exchange system, free-flows of capital and the independence of monetary policy, named"three poles paradox". With the openness of capital market, to improve the effectiveness of monetary policy, the reform of exchange rate system, improvement of monetary policy and the development of capital markets are also needed to put on the agenda.