[based on Geiger, 2006: 5-8; and Geiger, 2008: 3]
Mehran et al. (1996) interpret this as the insight of Chinese officials that long-term economic growth can only be realized if long-term price stability predominates, i.e. in their view price stability is the prominent target of the PBC (Mehran et al., 1996a: 19f.). The PBC itself also claims to pursue the stability of the currency as the sole target of its monetary policy. Asked about the two official final targets of price stability and economic growth and their ranking in terms of importance, a PBC official unambiguously made clear that the PBC is not supporting the two targets but only the first one. Only if the target of price stability is reached, he concluded, the central bank would help to pursue other targets, e.g. the promotion of economic growth ( 1 ).
In the context of the PBC, a non-independent central bank, it has to be doubted that the central bank is strong enough to ignore the goal of economic growth. In China the central banks’ decision process is not sufficiently independent from the State Council’s directive ( 2 ). And governments rather have an economic growth bias than a low-inflation bias ( 3 ). Thus, the interpretation of Mehran et al. (1996a) can only be supported in the context of an independent central bank constitution as it is, for instance, in the case of the European Central Bank (ECB). Therefore, based on the Law of the People’s Republic of China on the People’s Bank of China, it has to be concluded that the PBC pursuits at least two final targets, which are a paramount economical target and a less important political target.
Additionally, between 1997 and 2005, China maintained a de facto peg of the RMB to the USD. According to Anderson (2003) the peg needed to have the add-on of de facto or quasi, since the official regulation allowed the RMB to fluctuate within a certain bandwidth (Anderson, 2003: 4). The de facto peg officially appeared to be a crawling peg with very narrow bands. With predominating higher trading bands between 1994 and 1996 the crawling peg arrangement was literally used and the RMB showed an 18-month appreciation path from 8.7 RMB per USD in 1994 to 8.3 RMB per USD in 1996. Facing the outbreak of the Asian crisis the PBC narrowed the trading band and established the de facto peg of the RMB versus the USD with a trading band of 0.4 per cent around the RMB/USD 8.28 peg. The trading band was further tightened in November 2000 and stood at about 0.01 per cent fluctuation around the central parity of RMB/USD 8.277 until 21 July 2005. The RMB was not completely fixed, but the trading band was very narrow. However, the strictness of the de facto exchange rate peg to the USD leads to the conclusion that the de facto peg served as a final target of Chinese monetary policy up to 21 July 2005.
The immediate changes of the RMB reform in July 2005 included: i) an outright appreciation of the RMB against the USD of 2.1 per cent from 8.28 to 8.11; ii) the change from a peg versus the USD towards a peg against a basket of currencies; and iii) the reversion to the crawling peg system in which the RMB can be allowed to fluctuate against the USD up to 0.3 per cent against the exchange rate of the previous day (Anderson, 2005: 10; and Goldstein et al., 2007: 2-3). As a result, in the 18 months between July 2005 and December 2006, the exchange rate appreciated by a total of 6 per cent from 8.28 to 7.81 RMB/USD (PBC 2006g). The crawling peg has a very prominent role within the Chinese monetary policy set-up. Thus the exchange rate still has to be seen as the third final target of monetary policy in China.
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Footnotes
( 1 ) Interview with Mr. Huang, Secretary of the Monetary Policy Committee of the PBC on June 8, 2004.
( 2 ) Article 2 of the central bank law says: “The People’s Bank of China shall, under the leadership of the State Council, formulate and implement monetary policies” (N.A., 1995).
( 3 ) E.g. facing rising unemployment problems and sluggish growth in 2003 and 2004 European leaders repeatedly asked the ECB to lower the interest rates. On February 27, 2004 the German speaking newspaper “Die Welt” headlines “Schroeder and Raffarin call for an ECB interest rate cut [own translation]”.
