Monday, November 15, 2004

Someone asked me today how monetary policy is made in China. Below is my best guess, based on all the available information:

On the policy process of making interest rate, I think it goes something like this: The State Council has regular standing meetings (changwu huiyi) where the Premier probably asks for opinions on monetary policies from the heads of PBOC, CBRC, MOF, and NDRC. All of these guys have their own researchers doing projections and policy proposals. They will present the angle that best benefits their own agency. But most of the time, they just discuss the state of the economy.

If the Premier is really interested in changing something big like the interest rate, it might be discussed formally at the PBOC Monetary Policy Committee, which meets regularly on a quarterly basis, although 2/3 of the members can hold a meeting at any time. The MPC includes PBOC officials, representatives from two of the Big Four banks, as well as MOF, CSRC, SAFE, CBRC, and NDRC. Thus, the MPC is really a bargaining arena for the various agencies. As far as I know, however, the State Council regularly ignored the MPC's recommendations under Zhu Rongji. I don't know what Wen does.

The MPC then passes the recommendation on to the State Council. For something major like interest rates, Wen will most likely hold a meeting of the Central Finance and Economic Leading Group, composed of him, Huang Ju, Zeng Peiyan, Wu Yi, as well as the heads of PBOC, CBRC, CSRC, CIRC, MOF, NDRC, SAFE, SAMC, and most likely Ministry of Agriculture.

But CFELG will also just make a recommendation for the Standing Committee of the Politburo, which has the final say. However, my impression is that the Standing Committee most often goes along with the CFELG's recommendation on something technical like interest rate.

Hi Xiao Shih: You've got a comment below (under your previous post). Not sure if you've noticed it. But it would be great if you could respond to it.
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