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The People’s Bank of China (PBOC) – How Does It Affect Forex?

The People’s Bank of China (PBOC) – How Does It Affect Forex?

calendar 12/06/2023 - 11:32 UTC

The central bank of China, the second largest economy in the world that even surpasses the US economy on some metrics, is called the People’s Bank of China or the PBOC. With the importance of the Chinese economy to the global supply chains, this central bank garnered a spot as one of the most important central banks in the world. And, while being at the center of the massive economy, it has forex reserves equivalent to over $3 trillion US dollars. That is with a T. It has more forex reserves than any other central bank in the world.

With that much in the Chinese central bank’s reserves, it can institute some unconventional monetary policy tools. This allows it to prioritize not only local, as in China-focused, but localized solutions that can spur the economy towards prosperity in China. They must maintain a delicate balance between financial stability and economic prosperity throughout the country.

The People’s Bank of China also plays an important role in the Chinese one-party system. It does enjoy a certain degree of autonomy when comparing it to other state departments in thanks to a series of reforms it underwent. This unequivocal freedom lets China maintain its communist ideals while competing with other larger economies. On top of that, it serves as one of the 25 cabinet-level state departments. These form the state council. Meaning, the People’s Bank of China doesn’t only prosper thanks to a great degree of freedom, but also by having a great deal of power within the Chinese executive branch. You can find more relevant data on the Central Bank Database.

The History of the People’s Bank of China

The People’s Bank of China became the central bank of the country due to a merger between three other existing banks: Beihai Bank, Hubei Bank, & Xibei Farmer Bank. This happened right after the communist revolution, and their strides to consolidate power behind the one-party system. As the Chinese Communist Party consolidated power behind it, it also needed a central bank of its own. And thus, a central bank was formed as part of their new government.

The People’s Bank of China was founded by the major on December 1st, 1948, from the merger, and it was the only bank in China until 1978. Until then, the People’s Bank of China fulfilled both its central bank duties as well as providing commercial banking services. This period was christened China’s planned economy period. During that famous period, all other banks acted as de facto subsidiaries of the PBOC which the citizens couldn’t deposit their money into.

In 1978, the People’s Bank of China was split into four separate banks to promote competition. However, all of them remained under state control. Four years later, in 1982, one of those banks, that creatively inherited the name of the former, started to act as China’s central bank. It was the year of 1995, 13 whole years later, that the second iteration of the People’s Bank of China’s status as the nation’s central bank was made into law.

The most important landmark for us is when the People's Bank of China. In 2003, the PBOC achieved an enormous step towards greater autonomy. It was tasked with the overarching responsibilities of financial stability as well as economic prosperity for the people of the People’s Republic of China.

Structure of the People’s Bank of China

As one of the 25 cabinet-level state departments, they have access to relatively unchained self-governance for a one-state country. Their main offices are headquartered in Beijing with regional offices strewn throughout the nation. These offices are not subjected to the authority of local administrative governments and their jurisdictions. The People’s Bank of China itself is helmed by a governor and five deputies that are responsible for its overall operations with these five deputies supporting the governor.

The People’s Bank of China has no less than 18 departments within itself. This allows the Chinese to fulfill numerous functions and roles in China’s financial for its executive branch:

Plan and later execute monetary policies as well as macro-credit guidance policies.

Develop strategic plans for the country’s financial sector & then lead these reforms for the sector.

Plan, improve, and execute pertinent laws and regulations to help the performance of the central bank’s various other functions.

Issue Chinese Yuan (CNY), the Chinese currency, also known as Renminbi (RMB), and later manage its circulation.

Plan and later organize the financial sector of China to modernize as well as digitize its systems.

Collect important data to conduct macro-economic analysis as well as forecasting, and to later spread the useful findings to the public.

Take on the responsibility as the main leader of last resort for Chinese financial institutions to prevent any major financial risk through its liquidity.

Supervise as well as manage derivative transactions in all financial markets on top of the interbank lending market.

Plan and execute the Chinese Yuan (CNY) exchange rate against other currencies while also monitoring and tacking cross-border capital flows, exports as well as imports in other words.

Hold, manage, and operate the People’s Republic of China’s reserves of gold and forex.

Maintain and manage a functional social credit system as well as a national payment system while taking full responsibility for it.

Act as the representative of the government of the People’s Republic of China in international financial activities in the role of a central bank amongst other central banks.

The People’s Bank of China’s Unconventional Monetary Tools

As mentioned before, the People’s Republic of China has a one-party government. Therefore, there are checks and balances they put in place which are different from democratic countries with an open market economy. Central banks worldwide would rather regulate or deregulate an open market operation or change their country’s interest rates to stimulate different aspects of their underlying, respective country’s economy. The People’s Bank of China doesn’t have the autonomy to always do that, so they implemented quite the unconventional but targeted monetary policy to achieve their set goal without the aforementioned means. These include but not only:

Applying RRR (Required Reserve Ratio) cuts for banks and other financial institutions when lending to specific sectors within the Chinese economy like small-sized and medium-sized enterprises, SMEs, and agricultural businesses.

In turn, the People’s Bank of China has also redefined its LDR (Loan to Deposit Ratio) calculation. They have removed some deciding factors such as former financing loans by the central bank itself. This then automatically increases the size of loans other banks can loan from the central bank.

Change the money supply, the reserve ratio, and the discount rate as a major export economy that takes in a lot of different foreign currencies to control the Chinese Yuan (CNY) and not to deter importers from buying Chinese goods and commodities. They can repatriate any money exchanged by individuals and institutions alike.

You can stay updated on the official People’s Bank of China’s website.

The People’s Bank of China’s Forex Reserves

China is a top two player in the global financial markets despite its currency, the Chinese Yuan (CNY), not being traded much in currency pairs when trading forex. Still, China remains highly influential in forex markets thanks to the People’s Bank of China’s forex reserves of foreign currencies. With more than $3 trillion US dollars’ worth of forex reserves, the largest such holding in the whole world, they can influence the values of trades forex immensely without including their national currency. When the People’s Bank of China announces that it will increase or decrease a certain amount of forex in its reserves, the underlying instrument is affected by it too in the same manner. For example, if the People’s Bank of China announces to liquidate some of its US dollar reserves, the value of the US dollar itself will drop.

Not only does the People’s Bank of China has the power to influence forex, but they will intervene strongly in markets by applying big cuts to stimulate the Chinese economy or big hikes to cool it down respectively. They used to implement hikes and cools divisible by nine (0.09%) but moved to a less refined system to let the market correct itself as they’re divisible by 25 (0.25%).

Despite being designed to influence forex when needed, they do it so their rate hikes and rate cute won’t affect the value of the Chinese Yuan (CNY). They will affect other currencies, thanks to the strong trade ties between China and Australia, the Australian Dollar (AUD) may be affected by any Chinese monetary plan. The Australian Dollar constitutes one of the major currencies, and it is highly traded worldwide, making it vulnerable more than other major currencies.

Still, China has become more aware of its role as a major exporting economy, and it may curb at times its influence. However, they still have their doctrine to help prosper the Chinese economy first, so the People’s Bank of China can still harm other currencies for its economic advantage as the central bank of a major exporter.

You can look at upcoming events in the event calendar from the People’s Bank of China and other financial institutions worldwide here, and in turn, you can be more intuitive with your trades with that knowledge in mind.

In Conclusion

The People’s Bank of China is amassing enormous amounts of forex in different currencies from China’s status as a prime and cheap exporter. They follow their doctrine to spur the Chinese economy forward by keeping their currency low through economic stimuli and cooldowns. Because of the unique situation it has as a central bank in a one-party country, it applies unconventional monetary strategies to drive the Chinese economy forward. These may include decreasing or increasing its foreign reserves. Because of how big they are, they will influence the value of that currency accordingly. You can learn more about how forex is traded on the forex section.

The materials contained on this document should not in any way be construed, either explicitly or implicitly, directly or indirectly, as investment advice, recommendation or suggestion of an investment strategy with respect to a financial instrument, in any manner whatsoever. Any indication of past performance or simulated past performance included in this document is not a reliable indicator of future results. For the full disclaimer click here.

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