Concluding remarks

The paper is the first attempt to follow a narrative approach to derive indicators of the monetary stance of the PBoC. This is motivated by the observation that the PBoC uses a wide range of monetary tools, including market- or non-market based, quantity- and price-based measures. Under the circumstances, using the benchmark interest rate – a measure of short-term policy rates often used to gauge central banks’

monetary stance – cannot fully capture monetary policy changes in China. Our approach is to utilise public records, specifically the PBoC’s Monetary Policy Reports and press releases of the MPC meeting to assess monetary stance. Based on the PBoC’s stated policy stance, assessments of risks on growth and inflation, and policy actions recorded in these official communications, a number of monetary stance indices are compiled to indicate the direction and intensity of monetary policy. These indices are particularly useful in capturing changes in monetary policy in the early 2000s when often non-market based monetary tools were used. In more recent years, they show more co-movements with the benchmark interest rate, which suggests that

China Economic Issues – Number 1/10, January 2010

market-, price-based monetary tools are being increasingly used in macroeconomic management.

Utilising these indicators, the determinants of the PBoC’s policy stance are investigated. Our estimated monetary reaction functions for the PBoC’s show that the key factors of monetary policy are economic growth and inflation, which are in fact the PBoC’s stated mandate. Of the two main policy objectives, the PBoC appears to react more strongly to deviations of growth from targets. Among the different targets considered for the key economic variables (including the official targets, historical averages, trend growth derived using the Hodrick-Prescott filter), historical averages appear to best describe the PBoC’s targets, probably because it is more binding than the conservatively set official targets and more transparent than targets derived purely from statistical methods.

This first study using the narrative approach to study monetary stance in China opens up a whole new perspective to macroeconomic and policy developments in China.

Conceivably, many aspects of China’s monetary economics can be usefully studied afresh using this alternative way of measuring monetary stance. The most obvious aspects are to examine the impact of monetary stance on macroeconomic developments, tracing the transmission channels and effects on economic indicators using these alternative monetary stance indicators.

About the Authors

Chang Shu is a Senior Manager and Brian Ng Assistant Manager in the External Department of the Hong Kong Monetary Authority. The authors would like to thank Li Cui and Dong He for helpful comments. The authors are grateful to Christina Li for research assistance. The authors are responsible for the views expressed in this article and any errors.

About the Series

China Economic Issues provide a concise analysis of current economic and financial issues in China. The series is edited by the External Department of the Hong Kong Monetary Authority.

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Table 2b. 7-value monetary stance indicator: coding examples

Degree Criteria\Examples of wording

3 (Strongest tightening)
Implement tight monetary stance (落實從緊 的貨幣政策)

Prevent rapid growth from turning into overheating and prevent structural price rises from turning into a generalised inflation (‘雙防’ -- 防止經濟增長由偏快轉向過 熱, 防止價格由結構性上漲演變為明顯通 貨膨脹)

Intensify macroeconomic adjustment (加强調 控力度)

Further strengthen liquidity management (進 一步加强流動性管理)

2 (Strong tightening)
Continue sound monetary stance (繼續執行 穩健的貨幣政策)

Prevent rapid growth from turning into overheating (防止經濟增長由偏快轉向過 熱)

Maintain price stability (保持物價基本穩定)

Maintain the intensity of macroeconomic adjustment (保持必要的調控力度)

Strengthen liquidity management (加强流動 性管理)

1 (Tightening)
Implement sound monetary stance (執行穩健

貨幣政策)

Guide reasonable investment growth (引導投 資合理增長)/Prevent an investment rebound (注意防止投資反彈)

Maintain price stability (保持物價基本穩 定)/Closely monitor development of various price indices (密切關注各類價格指數的走 勢)

Maintain liquidity management (維持一定的 流動性管理力度)

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0 (Neutral)
Continue sound monetary stance (繼續執行

穩健的貨幣政策)

Maintain appropriate money growth (保持貨 幣適度增長)

-1 (Loosening)
Continue sound monetary stance (繼續實施

穩健的貨幣政策)

Continue the policy of expand domestic demand (繼續貫徹擴大內需為主的方針)

Maintain appropriate money growth (保持貨 幣適度增長)

-2 (Strong loosening)
Continue sound monetary stance (繼續實施 穩健的貨幣政策)

Intensify the support to economic

development (加大對經濟發展的支持力度)

Prevent a further deceleration of economic growth (防止經濟增長速度進一步減緩)

-3 (Strongest loosening)
Implement the moderately loose monetary policy (執行適度寬鬆的貨幣政策)

Further intensify financial support to economic growth (進一步加大金融對經濟 發展的支持力度)

Adopt policy measures to expand domestic demand and facilitate growth (採取擴大内 需，促進增長的措施)

Maintain ample liquidity (保持流動性充裕)

Guide reasonable credit expansion (引導金融 機構合理增加信貸投放)

Sources: PBoC and authors’ compilation.

Table 3. Descriptive statistics

%yoy Deviation from official target Deviation from historical average Deviation from potential output GDP

Mean 10.05 2.52 0.73 -0.20

Standard deviation 1.78 1.67 1.94 0.96

CPI

Mean 2.17 -0.63 0.97 -0.18

Standard deviation 2.50 2.14 2.60 1.31

M2

Mean 17.19 1.55 1.15 -0.38

Standard deviation 3.18 2.91 3.11 2.42

Credit

Mean 15.68 1.96 0.88 -0.46

Standard deviation 5.17 4.95 5.26 3.60

Unemployment

Mean 4.03 -0.53

Standard deviation 0.29 0.26

Sources: CEIC and authors’ calculation.

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Table 4. Estimation results using 5-value monetary stance indicator

Deviation from official target Deviation from historical average Deviation from potential output

Benchmark

1. ***, ** and * indicate that the coefficients are significant at the 1%, 5% and 10% level, respectively.

Table 5. Correct signals for the 5-value monetary stance indicators

Actual Strong

tightening Tightening Neutral Loosening Strong

loosening % of correct signals Estimated

Strong tightening 2 1 0 0 0 50.0%

Tightening 2 17 1 0 0 94.4%

Neutral 0 0 1 2 1 33.3%

Loosening 0 0 1 2 0 50.0%

Strong loosening 0 0 0 0 3 75.0%

Total 4 18 3 4 4 75.8%

Source: Authors’ estimates.

Table 6. Estimation results using 7-value monetary stance indicator

Deviation from official target Deviation from historical average Deviation from potential output

Benchmark

1. ***, ** and * indicate that the coefficients are significant at the 1%, 5% and 10% level, respectively.

Table 7. Estimation results using 3-value monetary stance indicator

Deviation from official target Deviation from historical average Deviation from potential output

Benchmark

1. ***, ** and * indicate that the coefficients are significant at the 1%, 5% and 10% level, respectively.

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Table 8. Correct signals for the 3-value monetary stance indicator

Actual Tightening Neutral Loosening % of correct signals

Estimated

Tightening 22 1 0 100.0%

Neutral 0 1 1 33.3%

Loosening 0 1 7 87.5%

Total 22 3 8 90.9%

Sources: Authors’ estimates.