The transmission of Chinese monetary policy: Domestic effects and global spillovers
In this paper, Silvia Miranda-Agrippino, Tsvetelina Nenova, and Hélène Rey analyze how Chinese monetary policy transmit domestically and globally today. The authors build a monthly Composite Monetary Policy Indicator (CMPI) that combines 36 PBoC tools (policy rates, facility rates, benchmark rates, LPR, reserve requirements, etc.), with time‑varying weights that reflect the shift from quantity to price-based instruments. An increase in CMPI corresponds to a tighter stance. They estimate a backward‑looking, endogenously switching policy rule where CMPI responds to:
– deviations of inflation from the government’s annual target,
– deviations of GDP growth from the government’s annual growth target (with a stronger response when growth undershoots),
– an exchange‑rate term capturing the CFETS RMB effective exchange rate and the spot–parity gap.
Findings – “Ins” (domestic transmission)
- Rates and yield curve: A contractionary CMPI shock raises short‑term money market rates (7‑day repo, 3‑month Shibor) by around 10–30 bps on impact, with effects fading after about a year; the impact is concentrated at the short end of the curve.
- Activity and credit: Output (industrial production) falls gradually to about −1 percentage point (yoy) at peak; real imports and exports fall more, around −2 percentage points. Money and total social financing contract persistently, indicating tighter domestic financial conditions.
- Prices: CPI shows a short‑run “price puzzle” (partly driven by housing costs) but declines with a lag; housing‑related CPI components rise more initially and then weaken, consistent with housing playing a key role.
- Exchange rate and capital flows: The RMB effective exchange rate reacts only mildly and with delay; the bilateral CNY/USD is kept almost flat or slightly weaker, while the non‑USD RMB basket appreciates. Private capital (FDI, portfolio, bank flows) retrenches with a lag; official FX reserves fall and required reserve ratios are cut, consistent with managed exchange rate cum sterilization.
Findings – “Outs” (international transmission)
- Global real spillovers: Global industrial production excluding China falls by roughly the same order of magnitude as Chinese output but with a delay; global trade excluding China contracts by about −2 percentage points (yoy). The mechanism runs through China’s central role in global value chains and intermediate goods trade.
- Commodity channel: Commodity prices decline significantly (order of −4 percentage points for broad indices, larger for industrial metals), with a delayed peak response. The authors show stronger effects for non‑energy and especially industrial metals than for other commodity groups.
- Dollar and financial conditions: The USD appreciates with delay, in line with a global “risk‑off” response to weaker activity; global financial conditions tighten only mildly and not as a primary transmission channel. The paper stresses that, unlike US monetary policy, Chinese monetary policy does not generate a strong global risk‑taking/financial‑cycle channel over the sample.
- Heterogeneous EM effects: Commodity‑exporting EMEs, particularly metals exporters, see a notable fall in capital inflows, while outflows barely move, implying a liquidity shock for these economies.
- US spillovers: US industrial production declines by an amount similar to Chinese IP, with a lag; US exports fall sharply, imports are more stable, so the US trade balance deteriorates. The fall in commodity prices feeds into US import prices, then into producer prices, and finally lowers US CPI inflation by about 30 bps at peak, despite the stronger dollar.
The Ins & Outs of Chinese Monetary Policy Transmission
Authors: Silvia Miranda-Agrippino, Tsvetelina Nenova, Hélène Rey
From: University of Oxford, Bank for International Settlements, London Business School
Wholesale funding’s role in Chinese monetary transmission
Kaiji Chen, Yiqing Xiao, and Tao A. Zha examine how interbank wholesale funding shapes monetary policy transmission and systemic risk in China’s banking system. The authors estimate a regime-switching Taylor rule for the 7-day repo rate (R007), where the response to GDP growth flips sign depending on whether growth is above/below the government’s annual target (pro-growth bias). Residuals are exogenous shocks. They use quarterly data (2013–2019) on 25 listed banks (state vs. non-state), covering balance sheets (wholesale funding, loans), SRISK (expected capital shortfall), plus macro controls. Regressions test transmission to funding/loans and risk amplification (triple interactions with GDP slowdowns post-2018).
Findings
- Transmission via wholesale funding: Easing shocks boost wholesale funding for non-state banks (+0.84pp share of liabilities per 1percentage points rate cut) but reduce it for state banks; this flows to non-state lending (+0.09 percentage points loan/asset per 1 percentage point cut for high-wholesale banks). State banks are unaffected.
- Systemic risk amplification: Non-state banks with high wholesale exposure see sharply higher SRISK during slowdowns post-2018 e.g., +7.7bn RMB expected shortfall per 1 percentage point wholesale growth.
- Model mechanics: Easing lowers reserve costs → deposit demand rises → non-state banks hit ceiling and tap state banks’ wholesale supply → reallocates capital to more-productive non-state banks. But builds leverage causes risk spikes in downturns.
Wholesale funding is key for PBoC transmission to non-state credit but creates macroprudential trade-off and needs calibrated caps.
A Trade-off Between Monetary Policy Transmission and Systemic Risk in China
Authors: Kaiji Chen, Yiqing Xiao, Tao A. Zha
From: Emory University, Peking University, Federal Reserve Bank of Atlanta
