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With the passing of the Law on the People's Bank of China by the Chinese Congress in March 1 995，the People's Bank of China (PBOC) as China's central bank has become the focal point of economic reform and macroeconomic control．This article addresses the PBOC's evolution into the major economic player it is today，its position vis-a-vis other actors in the real and monetary sector and potential future developments．
The changing function of banks and the implications for the PBOC Prior to the 1980s, enterprises in China surrendered all annual surplus to the Finance Ministry which，in exchange，supplied a11 funds for investment as well as the so-called "fixed-quota" working capital．The banking system merely served as the provider of short-term working capital loans to enterprises when the fixed-quota working capital turned out to be insufficient．The enterprise account was kept Separate from the houSeh01d account by requiring enterprises to settle all their monetary transactions through bank transfers and by restricting the household circuit to the use of cash．
In such a system，there was no need for any central monetary policy．Apart from being the administrator of occasional short term credit, the banking system's primary Purpose was book-keeping．In 1978 the PBOC was separated from the Finance Ministry and gained ministerial Status. In 1983 the PBOC was turned into a central bank．
The economic reforms．starting in 1978，led to two major changes in the banking system．First，enterprises obtained ever more decision．making authority and instead of surrendering all surplus to the state made tax payments (1983/84). Between 1980 and 1985 the Finance Ministry gradually replaced budget appropriations with credit．The banking system began making loans for working capital an for investment in fixed assets．Second，special banks (renamed state commercial banks in 1 994) were separated out of the monobank to better fulfill tasks in distinct sectors．With these developments，the need arose for centralized supervision of the banking system，centralized control of the money supply and finally，the implementation of monetary policy．
The relationship and other financial between the PBOC institutions
Monetary control broke down when special banks began to perform banking business beyond short．term 10ans for the purchase of materials．Two types of monetary plans issued by the PBOC subsequently gained priority in maintaining monetary contr01．The first was the " refinancing p1an" determining the refinancing by other financial institutions through 10ans from the PBOC．Table l presents the balance sheets of the PBOC and the U．S．Federal Reserve system which clearly shows the structural differences between the two central banks．
The second was the "credit plan" directing the other financial institutions．The two plans were de-linked in l987 when the PBOC no longer guaranteed refinancing to other financial institutions and instead established 10 calinter bank money markets．In 1994 all refinancing was recentralized and is now conducted solely at the central level between the PBOC and other financial institutions。headquarters．The credit plan contains both policy 10ans for particular projects or types of projects，at least in part at subsidized interest rates，and quotas within which banks may extend credit based on their own lending decisions．Today policy loans reportedly make up approximately 30％of a11 loans．
The total credit limit serves as the major target of the monetary policy．according to the l 995 PBOC Law．Although the publication of money supply targets started in 1995，the PBOC does not pursue their achievement through the monetary policy instruments used by other central banks such as open market transactions．changes in the minimum reserve requirement or discount policy．While the minimum reserve requirement came into existence in 1985．it is not an active monetary policy instrument．Since September 1 988 the required ratio has stood at a uniform 13% for all financial institutions．Since 1989 a "deposit safety requirement" of 5-7％has in effect presumably as "required" excess reserves．
Initial open market transactions by the PBOC have been announced for April 1 996；at end-1993 the amount of government securities outstanding was equal to only 15.9% of all 10ans by the PBOC to deposit money banks．The achievement of money supply targets thus still relies solely on the implementation of the credit plans；the annual National Economic and Social Development Plan mentions only the maximum increase in credit permitted for the current year(rather than money supply targets)．
The PBOC determines not only the interest rates in its business with other financial institutions but also the interest rates on loans by financial institutions to enterprises and on all deposits at financial institutions．During high-inflation periods the interest rate margin at financial institutions usually turns negative．
Apart from money supply and interest rates，the PBOC also performs further central bank tasks such as supervision of the banking system ranging from supervising all financial institutions．approving the establishment of new financial institutions and determining new issues of enterprise equity to organizing the interbank money market．
The PBOC's authority is perhaps at its weakest in the supervision of other financial institutions．While they are required to submit balance sheets and profit and loss accounts to the PBOC regularly and to accept inspections by the PBOC any time，it is reported that PBOC auditors are frequently refused the fight to inspect．The PBOC has only 7000 examiners and 2，300 auditing offices to carry out its tasks (compared to more than two million staff at other financial institutions and total lending by the state commercial banks of RMB 3.6 trillion by end-1994)．Recently both PBOC and some of the commercial banks have turned to foreign auditing firms for help in implementing external and internal audits．
The relationship between the PBOC and other government institutions
The rise of the PBOC has resulted in a corresponding fall of the Finance Ministry and the State Planning Commission in banking and monetary business．
In the mid-1980s the Finance Ministry, losing its grip on enterprise surpluses and on the exclusive financing of investment in fixed assets through budget appropriations，countered by maintaining control over the People's Construction Bank of China and by establishing in l988 a National Capital Construction Fund．The fund channeled budget appropriations to six central investment companies and the People's Construction Bank of China with repayment going back to the Finance Ministry．Since the Stare Planning Commission and central ministries participate in decision-making，these funds remained under administrative control rather than being allocated to the most efficient projects through independent investment and credit decisions．The scheme seems to have not worked properly as perhaps half of the loans were never repaid and funds were not provided to the National Capital Construction Fund to the extent originally planned．
By the early 1990s the State Planning Commission．formerly in charge of maintaining balance in the areas of investment and production, labor and finance had seen much of its authority eroded in all but the financial area through economic liberalization．The 1992 State Council regulation on "transforming the management mechanism of state-owned industrial enterprises" if fully implemented, would constitute a major blow to the status of the State Planning Commission．The Commission has fought back by expanding into the monetary sphere．In 1994 it took charge of the newly established State Development Bank by installing one of its deputies as president．In its first year of existence it is said to have absorbed much of the six investment companies and some assets of the People's Construction Bank of China.
Despite the establishment of the State Development Bank, the State Planning Commission is still a major player in determining the annual credit plan for the rest of the banking system both in terms of overall limits (quotas) and the identification of particular projects.
As a fiscal agent of the government the PBOC administers the state treasury, places new issues of government securities, holds the governments' foreign exchange reserves (together with the Bank of China) and gold, and until 1994 provided loans to the central government. The 1995 PBOC Law prohibits any further loans by the PBOC to the government.
Outlook
Since all changes in central banking that have occurred in China's economic reforms so far are consistently in the direction of Western-type central banking, absent an argument for any change in direction for the future, the next financial reforms may well continue on the same path.
In terms of monetary policy the credit plan is here to stay for at least another five to ten years until the financial system has stabilized and borrowers - still almost exclusively enterprises rather than households - face a hard-budget constraint. The PBOC is likely to continue experiments with rediscounting, to begin open market transactions, and to strengthen its supervision of the interbank money market which in early 1996 assumed nationwide scope.
The PBOC is unlikely to allow foreign banks to conduct business in local currency any time soon except on a trial basis or with severe restrictions. The special banks, despite the change in name to 'state-owned commercial banks,' are not yet commercial banks. They still fulfill policy tasks and are further hampered by past employment decisions and present interest rate policies. Foreign competition would at this moment cause more harm to state-owned commercial banks than is likely to be acceptable.
What perhaps separates the PBOC most from Western-type central banking is the lack of independence. Money supply (which in practice means credit planning with lending quotas), interest rates, and foreign exchange rates still require approval by the State Council, i.e., the government. All other major decisions regarding the monetary system, although they might be proposed by the PBOC, are still submitted to the State Council for approval. There is little likelihood for more independence any time soon.
Finally, with many of the old controls in the real economy (such as over investment, production, and prices) dismantled, the central government has come to rely heavily on the monetary system to exercise macroeconomic control. The government's economic authority in the hands of Executive Deputy-Premier Zhu Rongji has favored monetary over real controls (such as during the most recent period of economic overheating 1993/94). The focus of the government on the monetary system under the leadership of the PBOC suggests that the status of the PBOC may be further enhanced in the future. One possible next reform step, already under discussion at the PBOC, would be to allow interest rates to move toward market rates with possibly a relaxation in PBOC control over their determination. Monetary reform may thus come to drive enterprise reform-bankrupt state-owned enterprises would have difficulties paying higher interest rates – in an attempt to allow the monetary system to work along market-oriented lines while the problem of state-owned enterprises is marginalized rather than determining the reform agenda. |
