CHINESE CENTRAL BANK SHIFTS TRADING STANCE By James Kynge in Beijing
China's central bank open market operations have become a "main tool" of monetary policy, a top official said on Wednesday, in a further sign that Beijing is speeding up the modernisation of its financial system.
Dai Genyou, director of the monetary policy department of the People's Bank of China, said the bank had traded Rmb707.6bn (£53bn) in debts last year in open market operations, compared with Rmb176.1bn in 1998 after open market operations resumed in May of that year.
The central bank launched its open market operations in 1996 but suspended them soon afterwards because of obstacles such as a shortage of tradeable bonds.
The surge last year in the volume of open market operations was matched by a sharp increase to 461 in the number of institutions - mainly banks, insurance companies, stock brokerages and investment funds - participating in the market.
"The open market operations have become a main tool in monetary policy," said Mr Dai, quoted in the official Financial News.
His statement confirms a broad trend in the reform of the People's Bank toward slowly relinquishing the functions of a command economy central bank, and instead wielding influence through a series of market-based mechanisms.
The main reason for the surge in open market operations last year was the purchase of debt from financial institutions to help boost money supply and combat deflation, China's greatest economic ill.
The turnover of debt repurchase contracts on the interbank market was Rmb394.9bn last year, up from Rmb102.1bn in 1998.
"Commercial banks and other financial institutions have effectively balanced their capital surplus and shortage through debt repurchases," Mr Dai added.
The expanded liquidity in the interbank market has also helped improve access to renminbi funding for foreign banks and domestic securities houses. Both have participated more actively in the market since the second half of last year.
Such reforms, as well as plans to allow greater flexibility in domestic interest rates, are essential aspects of China's preparations toward allowing its currency, the renminbi, to become fully convertible eventually.
"The Asian financial crisis has not damped China's confidence in the Rmb's full convertibility," said Wang Yafan, a director-general at the State Administration of Foreign Exchange, which reports to the People's Bank.
Researchers in Government think-tanks said Beijing needed to loosen its control over interest rates to create a more efficient distribution of capital.