Balance of payment adjustments made by China through 2004
If there is one thing learned from Carbaugh (2004) about balance of payment adjustments, it is that it is very controversial as to what is the best way to influence the balance of payments. However, there are many possible tools that affect the balance of payments, it just not very easy to predict exactly what the effect will be. Raising interest rates, easing or restricting the money supply, increasing or decreasing the exchange rate (in a pegged-exchange-rate situation, such as China), and the extension or tightening of credit are some of the tools often employed by nations to adjust the balance of payments. Typically, China has typically relied on untraditional administrative edicts, such industry-specific constraints on the quantity of credit and project finance, to control its economy and, hence, its balance of payments. However, based on my research, it is my opinion that China is just starting to look at more traditional instruments for balance of payments adjustment. For example, an article from the China Economic Information Network from August 16, 2004, specifically states that China’s central bank is enhancing its monetary policy. To accomplish this, the Chinese central bank, known as the People’s Bank of Chin . . .
On September 1, 2004, the Chinese government released a new investment directory listing 267 areas that the Chinese are encouraging foreign investment, some of which are areas that were previously restricted. Another related policy is China’s ongoing reform of their investment system to simplify the procedures for foreigners to invest in China. In August 12, 2004, the PBOC went on record stating that it had no stance on interest rates, implying that it was going to continue to use other methods for monetary control and to manage its balance of payments adjustments. Another set of recent policies geared at affecting China’s balance of payments are policies increasing the convertibility of the Yuan to foreign currencies and the increased allowance of Chinese investors to invest in foreign stock markets in the foreign currency. In general, China’s recent policies related to adjustments to the balance of payments have been geared towards increasing savings, tightening credit and money, and increasing the inflow of foreign cash into China. However, since then, the PBOC stated in September, 2004 that interest rate increases will not be considered until the August macro-economic statistics are released and that the decision will likely be made on October 1, 2004. Once again, this is a balance of payments adjustment policy geared toward increasing the inflow of foreign money to China, increasing their current account debits, while aiding in expanding China’s economic capacity. In addition to these considerations, China has made specific changes geared towards increasing foreign investment in China by removing previously existing investment restrictions and publishing an investment directory for foreign investors. It is my belief that the PBOC’s enhancement of monetary policy is a step in the direction of China looking at more global-trade friendly approaches to the balance of payments adjusts. However, in recent times, China has enhanced their monetary policy to allow better control through the issuance and repurchasing of treasury bills and has alluded to the consideration of interest rate changes, specifically raising interest rates, to control the money supply. A recent example of an industry-specific investment control policy that has been changed to encourage foreign investment in China is the Chinese government’s lifting of restrictions of foreign investment in sectors such as mineral resources exploration and agriculture. The PBOC governor stated that if the PBOC does decide to raise interest rates, it would be in response to a decreased domestic savings rate and the fear of increasing inflation. As already mentioned, it will not be known if China will raise interest rates until October 1, 2004. These policies seem to be geared towards the Chinese trying to decrease the Yuan supply. It was noted earlier that China has typically used non-traditional forms of monetary control.
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