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China Briefings

Reports on China issued by Samsung Economic Research Institute

Monetary Policy: Key Features and Implications

Monetary Policy: Key Features and Implications

OM Jung-Myung

Aug. 8, 2011

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During the 2008 global financial crisis, the Chinese government significantly boosted lending to cope with a possible sharp economic downturn, which led to a drastic increase in money supply. The economy got back on its feet thanks to the government's expansionary fiscal stance. However, as upward pressure on consumer prices continue, the government has shifted towards price stabilization via curbing the growth in money supply.

Four major state-run banks, which take the lion's share in the financial industry, have stable financial structures and basis for revenue due to the government's favorable policies and strict regulations. They have influenced other financial institutions and markets in their decisions on interest rates through the interbank market. The biggest characteristic of the interbank market since the 2000s is the surge in central bank bill issuances.

The government's strict regulations on bond issuance have dampened bond markets. As of now, China is preventing the sudden in-and outflow of foreign capital by restricting the trade of capital items, but easily obtains foreign capital through Hong Kong, where the issuance of Dim Sum bonds has shot up. At the moment, the structure of China's financial industry and financial policies are unlikely to deal a blow to financial systems, however, they have failed to ensure efficiency in distributing financial resources.

Rate liberalization can bring about another financial crisis therefore the current money supply-oriented financial policy is expected to continue for a considerable time. Changes in money growth rates and subsequent interbank market reactions should be monitored carefully. Turning the yuan into settlement currency needs to be reviewed to stabilize Korea's financial industry. But when it comes to this issue, Korea should negotiate with China comprehensively in both economic and diplomatic terms.

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