The Central Bank of China, also known as the People’s Bank of China (PBOC) is the largest financial institution in China. It concentrates on managing the money supply in the economy, interest rate, and the currency of China, known as the Renminbi (RMB). Other roles of the central bank include distribution of currency throughout the economy and mainly to banks and financial institutions (Burdekin & Siklos, 2008). It also focuses on controlling the rate at which commercial banks borrow from each other and governing the bond markets amongst them. Finally, but not least, the PBOC has the task of managing gold reserves and state treasury. China has one of the leading economies globally regarding its high nominal Gross National Product. It also possesses an enormous purchasing power in comparison to other economies such as the United States of America. Fortunately, the growth of this economy has been incrementing steadily at a rate of 10% for the past 30 years (Lardy, 2005). The primary reason behind this tremendous growth is the enormous demand for foreign goods and services, especially by foreigners. As such, it is one of the key areas of concentration of the monetary and financial policies in China. Thus, it aims at promoting economic growth and stabilizing the country’s currency.
In general, various tools of the monetary policy apply to the economy of China similar to other economies globally. First, there is the Reserve Requirement Ratio, where the PBOC determines the number of deposits that the commercial banks in China will retain and lend to the public as well as the government. It also determines the Liquidity Reserve Ratio, which sets out the amount of liquid cash that each commercial bank can store (Huashu & Yue, 2003). Both tools depend on various factors such as the size of the bank and the number of loyal customers. The PBOC may also persuade the Chinese commercial banks to regulate the amount of lending to the public to control the money supply circulating in the market. The above tool or strategy is known as moral suasion. Other instruments of monetary policy used by the PBOC include the open market operations, which allow the government to borrow from the large institution through the selling and buying of government bonds and treasury bills (Ping & Xiong, 2002)…..