MNI 5 THINGS: China Must Reform Policy Tool: Ex-PBOC Economist

     BEIJING (MNI) - China needs to reform its monetary policy framework to

improve efficacy and accuracy for communicating with and guiding financial

markets, Ma Jun, former chief economist at the People's Bank of China (PBOC),

said in a report. Ma is now director of the Center for Finance and Development

at Tsinghua University, one of the country's leading think tanks.

     Here are five recommendations China should undertake in the next 2 to 3

years, according to Ma: 

     - The PBOC should do away with setting objectives for the yuan exchange

rate and stop using the expression "maintaining the basic stability of the

exchange rate at a reasonable and balanced level". These changes could

effectively improve the flexibility of the yuan exchange rate, guarantee the

independence of monetary policy and facilitate the PBOC's eventual withdrawal

from market interventions. Currently, the PBOC has been sometimes forced to

impose high-cost capital controls because the currency's stability has been tied

to economic targets. 

     - The PBOC should replace the benchmark loan and deposit rates with a

short-term interest rate, such as the 7-day repo rate, as the only policy rate.

The policy rate should remain stable. The central bank should further increase

the qualified collateral for its monetary policy instruments, including that of

the Standing Lending Facility (SLF), so as to increase the efficiency and

credibility of the interest rate corridor. 

     - The PBOC should further reduce banks' required reserve ratios (RRRs) to

increase the liquidity multiplier effect. The current high RRR levels limit the

interest rate transmission mechanism and hinder Chinese banks' participation in

international competition when the country opens up its capital account.

     - The PBOC should be given the decision-making and executive power over

monetary policy by the State Council. The PBOC has been given too many economic

objectives by the cabinet. This subordination distorted monetary policy signals

and made transmission of monetary policy inefficient, with the level of interest

rate transmission efficiency relative to the U.S. measuring about 75% for the

bond market and less than half for the interbank market. An independent central

bank would have resulted in lower growth rates for both M2 and the macro

leverage ratio. 

     - The PBOC should offer more derivative products to improve policy rate

transmission and encourage banks to participate in the interest rate pricing

system. These may include derivatives based on 7-day deposit repo rates or other

short-term money market rates, Ma said. 

--MNI Beijing Bureau; +86 (10) 8532 5998; email: marissa.wang@marketnews.com

--MNI Beijing Bureau; +86 10 8532 5998; email: william.bi@mni-news.com

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

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