In the grueling transition from a centrally planned economy, one of the most daunting challenges confronting the Chinese state in the post-1978 era of market-oriented economic reform has been to transform old institutions and to establish a flotilla of new institutions capable of managing and regulating the emerging market-oriented economy (Yang 2004). A particular challenge has been to try and build a sound market-oriented monetary and financial infrastructure. Monetary and wider macroeconomic stability has been a major challenge for China. Consumer price inflation is among the “primary” problems confronting transition economies (Maxfield 1997, 10). This has been especially so in...

The rise of the PBC is a story about institutional change and political relationships. In this book we focus on the leaders of the PBC and how they molded and changed the Bank as an institution and enhanced its capacities. In turn these leaders used their enhanced institutional capacities to forge mutually supportive relationships with the leadership of the party-state, all of which helped elevate the Bank’s policy influence and authority. The approach we use in explaining such change foregrounds agency and recognizes that institutional and wider contexts of action are not only constraining but are also potentially empowering, offering...

This chapter and Chapter 4 deal with the impact of the institutional and structural constraints imposed by the party-state and the legacies of the central planning era on the rise of the PBC and on the dynamics of monetary policy during the first era of economic reform from the late 1970s to the early 1990s.

As the PBC governor Zhou Xiaochuan (2006, 8) suggests, “the traditional planned economy leaves a mark in people’s mentality.” In the first part of this chapter we examine the key structural dynamics of the transition and the impact of the Leninist legacy on the PBC....

Under the central planning regime between 1978 and 1992, monetary policy took the form of rigid financial planning in conformance to the physical plan. However, the rigid control of cash and credit did not eliminate inflation, but disguised it under pervasive shortage and repressed consumption (Kornai 1980). As production factors were gradually liberalized and market forces increased in salience, inflation became more prominent. Despite the initiation of market reforms from 1978, we see a substantial continuity of financial planning in the 1978–92 period in that the Credit Plan remained and played a major role in the PBC’s efforts to...

We have seen how China’s gradualist transition, the persistent legacies of the planning regime, and the centralized Leninist state all posed stark problems for the institutional rise of the PBC during the first reform era. Yet if this era was marked by institutional legacies and the long shadow cast by the central planning system, the second reform era from the mid-1990s slowly saw these effects wane as the process of “growing out of the plan” gathered pace (Naughton 1995). Indeed, a series of interlinked and increasingly important wider contexts helped shape the institutional rise of the PBC. The impact of...

An important dynamic of Chinese politics stems from the interplay between the party elite and key elements of the Chinese bureaucracy. In this chapter we explore the relationship between the PBC and the leadership of the party-state, a relationship that has been critical to the rise of the PBC. We begin by reviewing elite-bureaucratic relations. While highlighting the importance of institutional dynamics in China’s politics and governance, the literature tends to either under- or overemphasize the importance of the party leadership. In this chapter we present a more nuanced account by showing how the rise of the PBC’s authority stemmed...

During China’s second reform era beginning in the early 1990s, in the wake of the economic and political turbulence of the late 1980s, the PBC rose to a central place in Beijing’s economic hierarchy. In this chapter we outline the main formal institutional changes to the central bank’s role during this era. These changes saw a substantial consolidation of the PBC’s formal monetary and financial authority, all part of its becoming a more modern central bank overseeing a monetary order featuring a greater role for market-based policy instruments.

As we saw in Chapters 5 and 6, the increasing informal authority...

In previous chapters we have examined the evolution of the formal and informal dimensions of the PBC’s growing authority in the second reform era. Here and in Chapter 9 we show how this has helped shape the evolution of China’s monetary policy since the early 1990s.

Equipped with its new institutional mandate and in the context of the market reforms of the 1990s, the PBC has embarked on building a more market-oriented monetary policy framework, including the growing use of indirect instruments. While the PBC eventually phased out financial planning, it nevertheless continued to maintain a range of direct administrative...

We saw in Chapters 3 and 4 how during the first reform era in the 1980s, the dynamics of the economy, the institutional legacy of central planning, a marginalized PBC, an ineffective monetary policy, and the political machinations within the leadership of the party-state helped produce major price and economic fluctuations. Monetary policy throughout this era was broadly expansionary and ultimately helped ignite major outbreaks of consumer price inflation in the late 1980s and early 1990s. By contrast, since the mid-1990s, monetary policy has been more disciplined and inflation better controlled than in the first reform era. Given a similar...

This chapter traces the evolution of China’s foreign exchange rate policy, reserve management, and the internationalization of the renminbi (RMB), focusing on the PBC’s changing and growing role in this arena. This arena is important to the PBC because the managed exchange rate system and the resultant growth in foreign exchange reserves pose major problems for domestic monetary policy. This is why the PBC has an interest in exchange rate liberalization. Corresponding to the rising clout of the PBC in the monetary policy arena, we argue that a somewhat similar story can be told on the exchange rate front and...

The large state-owned banks (SOBs) in China have emerged as among the largest but perhaps the most challenged banks in the world. Banking reform has become a key aspect of wider financial reforms in China and an essential component of the PBC’s quest to build a more market-oriented monetary and financial system. The 1995 Central Bank Law assigned the formal task to the PBC of ensuring overall stability in the financial system, which had been constantly jeopardized by a problematic banking sector plagued with mounting bad loans. Government intervention and irregular practices have also significantly distorted the banking sector and...

During an interview, a PBC official gave a vivid analogy of the politics of reform amidst transition, and the complex institutional challenges it entails: “China is very much like a giant leaking ship. We cannot stop and repair the ship, otherwise it is bound to sink. We have to mend it while it sails until reaching the shore. In other words, we have to reform amidst development, and to develop amidst reform. There is no other alternative.”¹ The rise of the People’s Bank and the modernization of China’s monetary policy that we have examined in the book, illustrates the many...