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Central Bank: Clearer Positioning Needed

Nov 28-2020   



Independence of the central bank is an important part of the modern central bank system, said Prof. Huang Yiping, Deputy Dean of the NSD, in a CF40 (China Finance 40) internal seminar on the amendment of the Law of the People’s Bank of China and the building of a modern central bank system. He also chairs the academic committee of CF40.

 

The Law of the People’s Bank of China was enacted 17 years ago and is now working on a reboot through public consultations. The updated version will legally task the central bank with the responsibility of ‘building a modern central bank system’.

 

Since the end of the Bretton Woods System, central banks have acquired the flexibility of determining money supply; on the other hand, they have been confronted with such issues as excessive issuance of sovereign currency and accumulation of financial risks. Since the governments’ urge for excess liquidity is hard to check, it’s of crucial importance to ensure the independence of central banks, said Prof. Huang.

 

The revised version of the Law of the People’s Bank of China has many bright spots with regard to the ways to define the independence of the central bank, its functions, and relevant coordination mechanisms. For example, the amendment specifies the macro prudent management function of the central bank and touches upon the digital format of the RMB for the first time.

 

However, the People’s Bank of China still faces the problem that its positioning is not sufficiently clear, said Prof. Huang. In his speech at the CF40 seminar, he pointed out three major issues: First, the central bank has acquired some independence in monetary policymaking, yet the accountability mechanism hasn’t been clearly defined. Second, China seems to move towards a certain type of mega-central bank system by placing many policy functions in the central bank. The question to ask is if this arrangement is a transitional one or a long-term framework. Third, the relationships between the central bank and the Financial Stability Board haven’t been ironed out. This invites the question about how to ensure active cooperation among relevant supervisory authorities.

 

Central Bank: Clearer Positioning Needed

Nov 28-2020   



Independence of the central bank is an important part of the modern central bank system, said Prof. Huang Yiping, Deputy Dean of the NSD, in a CF40 (China Finance 40) internal seminar on the amendment of the Law of the People’s Bank of China and the building of a modern central bank system. He also chairs the academic committee of CF40.

 

The Law of the People’s Bank of China was enacted 17 years ago and is now working on a reboot through public consultations. The updated version will legally task the central bank with the responsibility of ‘building a modern central bank system’.

 

Since the end of the Bretton Woods System, central banks have acquired the flexibility of determining money supply; on the other hand, they have been confronted with such issues as excessive issuance of sovereign currency and accumulation of financial risks. Since the governments’ urge for excess liquidity is hard to check, it’s of crucial importance to ensure the independence of central banks, said Prof. Huang.

 

The revised version of the Law of the People’s Bank of China has many bright spots with regard to the ways to define the independence of the central bank, its functions, and relevant coordination mechanisms. For example, the amendment specifies the macro prudent management function of the central bank and touches upon the digital format of the RMB for the first time.

 

However, the People’s Bank of China still faces the problem that its positioning is not sufficiently clear, said Prof. Huang. In his speech at the CF40 seminar, he pointed out three major issues: First, the central bank has acquired some independence in monetary policymaking, yet the accountability mechanism hasn’t been clearly defined. Second, China seems to move towards a certain type of mega-central bank system by placing many policy functions in the central bank. The question to ask is if this arrangement is a transitional one or a long-term framework. Third, the relationships between the central bank and the Financial Stability Board haven’t been ironed out. This invites the question about how to ensure active cooperation among relevant supervisory authorities.