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Money Market Operations in China:

Monetary Policy or FX Policy?

May 2007
Shigeto Nagai*1
Hong Wang*2

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This paper discusses the role of money market operations by the Chinese central bank in a transition period of the monetary policy framework. We argue that in recent years, especially before and after the change in the foreign exchange rate regime in July 2005, money market operations have been focused mainly on China-US interest rate differentials, which significantly influence the RMB exchange rate. On the other hand, the task of demand control for the purpose of price stability continues to rely on direct control measures taken by the central bank and other government agencies with respect to bank lending and investment.

Money Market Operations, Exchange Rate Policy, Interest Rate Differentials

We express special thanks to Takeo Nakamura, Wataru Takahashi, Yousuke Tsuyuguchi, Kumiko Okazaki, Rikuichi Niikawa, Tomoyuki Fukumoto, Seisaku Kameda, Yoshiaki Azuma, Ryuukou Uehashi, Yuuji Yamashita, Ryouta Kojima, for their insightful comments and suggestions. We are also grateful to numerous other colleagues at the International Department of the BOJ, who provided substantial research assistance. The views expressed in this paper are those of the author(s), and do not necessarily represent those of the Bank of Japan. This paper was written based on data and information available at the end of February 2007.

  • *1 International Department, Bank of Japan
  • *2 International Department, Bank of Japan


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