Macroeconomic Policies used by the Government and Central Bank of China - Essay Example

Macroeconomic Policies used by the Government and Central Bank of China College: Introduction China has steadily moved inthe direction of entrepreneurship and globalization since the start of economic restructurings over thirty years ago; evidently, the foreign investors in the country and development of trade with more countries around the globe are the main contributors for China’s general economic advancements (British Embassy 2013). The basis of everything was the adjustment of the exchange rate and adopting a twofold altercation rate structure that took place just before the end of the twentieth century; additionally, it is from these steps that China has been able to dominate the exports market (Chung 2014). Resultantly, China made an agreement with the International Monetary Fund that saw it joining the World Trade Organization and from then, the country has world-record economic advancements from dominating in foreign trade and multiple influxes of extraneous nonstop investments. In the management of any economy, the state and authority have the obligation of approving the contradictory policies (especially for currency) because failure to this results to instability of currency both at home and around the globe, mostly a decrease in value. This is a nightmare for any country or market so the monetary authorities enforce all the conflicting policies to avoid such a situation. Most of the business gurus and specialists argue that it is impossible for a country or economy to have utter investment suppleness, stable exchange rate and sovereign pecuniary policy all at the same time; definitely, at a particular time, one of these three factors changes. For the last two years, they has been a steady rise of influxes of international capital into China with the above issue of having all the three factors emerging everywhere around the country; however, the core facilitator of this is the projected escalation in value of the RMB chattels after its rise (Flassbeck 2014). Discussion and Background As of mid-2013, China’s extraneous exchange investments were over three thousand billion dollars, which was around three quarters of the assets of the core bank in China, PBC; resultantly, the government has contributed greatly to this, especially with its increased persistence on the matter of appreciating RMB. During a period of ten years (2003-2013), China’s funds multiplied by eleven times with a greater increase margin for foreign exchange; obviously, this development over such a period is impressive for any economy. Decisively, the central bank of China (People’s Bank of China) lay out policies and initiatives for stability purposes and avoidance of issues of surplus liquidity, price increases and asset value fizz (Mohanty 2014). Some of the common policies entailed issuance of bank bills, executing credit apportionments and levitation of the contingency prerequisite ratio. However, as the government of China put effort in alleviating the impact of the steep growth there has also been an impact of the overall efficiency and sustainability of the excess neutering policy due to its mounting expenditures. The growing costs arise for the sterilization policies that focus on the reservation of local currency and liquidity; generally, the growth in the economy has forced the government and the central bank to inculcate more policies day after day for the past two years as a sustainability precaution. However, this started a while back but it has become intense since the end of the year 2012 where the expansion of issuing bank bills by the PBC rose steeply affecting even its total debt (Sadeghian et al 2013). All the same, China seemed to get a hold of this last year but despite the slight decrease, the debt rate was still high. moving only 3%, which is worrying with the current condition of the country’s economy. As of last year, discussion of this matter was not in depth, with very few people in the government and the central bank pointing it out because China was making major developments and flourishing in the international and local markets; however, today one can only define this as an ignored sign that China’s purification dogmas have major sustainability issues. Most of the governments and states dictate the situation of an economy by exploring factors on effectiveness and sustainability; comparatively, all the policies require such an evaluation. Appreciably, China’s policies have had a great impact and most of them served their purposes, but this was only for a certain time meaning that the government and the central bank made little effort in exploring whether they would uphold sustainability (Flassbeck 2014). Resultantly, lack of sustainability has also affected the effectiveness of some controls especially for capital and local money supply. The effects of this include unwarranted financial stream and liquidity leading to influxes in the markets, which is another sign that China’s policies require addressing, understanding and utter review. China has been upfront in implementing different strategies for the slackening impact of the international financial crisis; moreover, these initiatives are very different from the ones applied in the United States and the United Kingdom. Resolutely, a clear analysis is essential on the nature of the different policies: Fiscal Policy Naturally, the implementation of this policy in China is no different from other states where the governing authority set up finances for economic development purposes; nonetheless, the difference comes in from the fact that China utilized the execution to the fullest by hastily directing a lot of money for expenditure to the economy. Financial imbalance is another aspect of this policy that makes China stand out because as compared to other countries, there are enormous gaps between the spending and the reserves at all levels of the government (Chung 2014). This gives the Government of China more control of the economy meaning that it initiates most of the policies and steps concerning the financial resources; however, the government must harmonize the spending acknowledging any contributions by the People’s Bank of China on that particular matter, especially on expenditure (Sadeghian et al 2013). The Fiscal policy is complicated in China because there is no forceful structure to oversee or facilitate the transfer of funds the middle and low-level authorities, especially since the implementation took place speedily. Monetary Policy Unlike the fiscal policy, the monetary policy operates differently in China due to the increased echelons of directive and moderately intransigent exchange rate in the pecuniary segment. There are multiple banks owned by the state in China and each one of them does everything in their jurisdiction to make sure that they emerge at the top hence the government deems it best if it sets the interest rates. Moreover, the Government of China also regulates the amount that each of these banks should loan through the set quantity policy of lending. The People’s Bank of China and the China Banking Regulatory Commission are the key players of the fiscal allocation as they oversee the disaggregation, setting and assignment of finances to the different banks (Sadeghian et al 2013). For the past three years, China has had low interest rates and a reserved stream of credit hence even after the rates alteration the ultimatum for credit is least affected; obviously, this is another core difference in implementation of this policy compared to other countries outside of Asia. Efforts by the central bank to neuter influxes affect the amount of credit in the economy and the Government of China has very few chances to do something about this because of it taking charge of the exchange rates. The PBC put some effort in neutering the influxes by issuing bonds in 2013 but this had significant impact but the China still faces issues related to the same in 2014. Today, one would argue that China has the capability of overcoming any threatening situation due to its impressive fiscal stature dominating most of the industrialized and emerging countries; however, as time passes by threats and challenges continue to risk. Concurrently, the economy of China is at zero equilibrium with some factors high (venture intensities, firm credit evolution) and others such as depletion’s portion very low; however, it is evident that the source of these problems is the strategies set by the government and the central bank. Conclusion Assertively, the government and central bank of China are aware that the country requires economic reforms and even the best policies or initiatives to lay out based on reducing the instability in the country (British Embassy 2013). Definitely, if there are no reforms to change the current situation of China, then all one would expect is an economic downfall for the country and other relative markets. Bibliography British Embassy, 2013, ‘China Economy- Microeconomic Scenarios and Prospects for Reform’: British Embassy, Beijing, viewed 18 November 2014, https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/279860/China_Economy_-_macro-scenarios_and_prospects_for_reform__2_.pdf Chung, C. 2014, ‘The Effectiveness and Sustainability of the Sterilization Policy in China’: Economics Research International, viewed 18 November 2014, http://www.hindawi.com/journals/ecri/2014/509643/ Flassbeck, H. 2014, ‘China’s Spectacular Growth since the Mid-1990s-Macroeconomic Conditions and Economic Policy Challenges’, viewed 18 November 2014, http://www.rrojasdatabank.info/chinaglob05/chinaglob05p1.pdf Mohanty, S. 2014, ‘The Role of Central Banks in Macroeconomic and Financial Stability’: Monetary and Economic Department, Bank of International Settlements, viewed 18 November 2014, http://www.bis.org/publ/bppdf/bispap76.pdf Sadeghian, D, White, G &D’Arcy, P. 2013, ‘Macroeconomic Management in China’: Reserve Bank of Australia, viewed 18 November 2014, http://www.rba.gov.au/publications/bulletin/2013/jun/pdf/bu-0613-2.pdf Read More