PBoC meeting

• What is the central bank of China?
• Who is the governor of the PBoC?
• What is the PBoC monetary policy committee?
• How do PBoC meetings impact financial markets?
• How the PBoC impacts exchange rates
• History of the PBoC

What is the central bank of China?

The central bank of China is called the People’s Bank of China or PBoC. It’s the body in charge of setting monetary policy – including setting interest rates – and regulating financial institutions in mainland China.

The PBoC is known as the most financially resourceful bank in the world, but as of 2024, it has the third-largest total asset holding of any central bank, totaling $5.1 trillion – the other largest being the Fed ($7.8 trillion) and the BOJ ($5.5 trillion).

Who is the governor of the PBoC?

The PBoC is managed by the governor and a number of deputy governors – all of which are appointed by the National People’s Congress and Premier of the State Council.

What is the PBoC monetary policy committee?

The PBoC monetary policy committee is the body that proposes interest rates and creates policies with the goal of hitting the country’s inflation targets.

However, the monetary policy committee is only really considered an ‘advisor’, as effectively the PBoC needs approval from the State Council before any changes can be implemented. Calls have been made for the MPC to be completely independent to set rates and govern its own interest rate announcement calendar.

We don’t know as much about what happens in PBoC meetings as we do about the Fed or the Bank of England meetings, since fewer details are released.

How do PBoC meetings impact financial markets?

As with any central bank meeting, the setting of interest rates has a direct impact on the price of currencies, stocks and bonds. This means that traders will watch the announcements, and any surprises – such as dramatically higher or lower than expected rates.

How the PBoC impacts exchange rates

The PBoC manages the yuan’s value extremely closely. The yuan is pegged within 2% to a basket of currencies that reflect its relationship with trading partners – the basket is weighted toward the US dollar. China does this to hedge against changes in the dollar’s value, which has a direct impact on the value of the yen.

The peg was modified in 2015 to make the yuan more susceptible to market forces. So, the yuan’s reference rate is now equal to the previous day’s closing price.

China has been accused of deliberately manipulating the yuan’s value, keeping it low in order to make its exports cheaper and more competitive on a global market. However, this has never been proven.

The PBoC holds USD in large quantities in its foreign reserves in the form of US treasuries. When the PBoC buys the dollar, the supply is reduced and the price of the USD rises, and vice versa when it sells it. So, if the US dollar rises too far above the peg, the PBoC has been known to sell US treasuries in order to drive down the dollar’s price.

Following the change, the yuan’s value was able to fall from over 6.1 yuan per dollar to 6.4 yuan per dollar; in order to stabilize its price, the PBoC used its dollar reserves to buy back yuan from Chinese banks to raise its value and depress the USD.

The competitive relationship between the Chinese and US economies means that whenever there’s a slowdown in China’s economic growth, or a stock market decline, the US dollar gains in strength. And whenever the US declines, Chinese markets tend to receive a boost.

History of the PBoC

The PBoC was established on December 1, 1948, when the Huabei Bank, Beihai Bank and Xibei Farmer Bank combined. It was initially the only bank in the Republic of China, controlling central and commercial operations.

Any other mainland bank was a division of the PBoC, giving the PBoC complete control over private banks.

Then, in 1978, as part of a series of economic reforms, the State Council split the commercial banking arm of the PBoC off into four independent (but still state-owned) banks:

• The Industrial and Commercial Bank of China (ICBC)
• The Bank of China (BOC)
• The Agricultural Bank of China (ABC)
• The China Construction Bank (CCB)

It wasn’t until 1983 that the PBoC was formally recognized as the central bank of China.