CHAPTER 2 70 YEARS OF NEW CHINA'S MONETARY POLICY FRAMEWORK：CHANGES AND TRANSFORMATION

In the past 70 years since the founding of the People's Republic of China，China's monetary and financial management systems and the concepts behind have been evolving along with the changes in China's economic system and at different stages of economic development. What remains unchanged is that monetary finance has always played a vital role in economic development throughout the seven decades. Focusing on “monetary policy framework”，which is a core topic in monetary finance both in theory and in practice，this paper systematically reviews the historical changes of China's monetary policy framework in the past 70 years，analyzes its current situation and upcoming challenges，and discusses the direction for its future transformation.

Monetary policy framework in its narrow sense consists of four parts：objectives，tools，rules，and transmission channels，while objectives can be further divided into ultimate objectives and intermediate objectives（Figure 2.1）. In its broad sense，monetary policy framework also includes the money creation mechanism in a country or economy. Monetary policy framework in the narrow sense examines and understands monetary policy from the perspective of macroeconomic regulation and control. Although the money creation mechanism does not fall into the scope of macroeconomic regulation and control，it is the core issue of monetary policy and the basis for the operation of monetary policy framework，a concept more fundamental than the monetary policy in its narrow sense，the latter of which aims at macroeconomic regulation and control. It is fair to say that money creation mechanism serves as the foundation for any discussion on objectives，tools，rules and transmission channels of monetary policy. This is especially true in current situation，where China is experiencing a special period of economic and financial structural transformation，and its money creation mechanism is also undergoing profound transformation. The discussion on monetary policy framework is inseparable from the full understanding of money creation mechanism and its internal changes. Therefore，this paper also takes money creation mechanism into consideration，and comprehensively expounds the historical changes and current characteristics of monetary policy framework from five dimensions：money creation mechanism，objectives，tools，rules and transmission channels of monetary policy.

Before elaborating on the monetary policy framework，it is necessary to conduct a brief review of the historical evolution of China's monetary and financial management system in the past 70 years since the founding of the People's Republic of China，as an institutional background for the following text. China's monetary and financial management system dates back to the National Bank of Soviet Republic of China established in Ruijin，Jiangxi Province in 1931 during the Second Revolutionary War Period（Dai Xianglong，1998；Liu Guokun，2012）. During the subsequent Agrarian Revolution and the War of Resistance against Japanese Aggression，multiple base areas issued currencies circulating in their respective area. In December 1948，the People's Bank of China was established in Shijiazhuang on the basis of the former North China Bank，and began to issue RMB as the legal tender. At the beginning of the founding of New China，a uniform national currency was created[1] and a unified and vertical national banking system was established. The beginning of the first “Five-Year Plan” in 1953 indicated that China became a planned economy. Under the highly centralized and unified system of economic planning and management，the national banking system and planned management of the monetary and financial sector were also highly centralized and unified. The People's Bank of China performed dual functions，serving as central bank as well as commercial bank—it was “the central bank that issues currency and carries out finance management，and a financial institution engaged in banking activities such as credit，savings，settlement，and foreign exchange.”[2] The macroeconomic management of this period mainly focused on economic activity management，which was supplemented by value management，and the allocation of funds mainly focused on finance，which was supplemented by monetary credit. From July 1969 to January 1978，the Ministry of Finance even co-located with the head office of the People's Bank of China，and monetary finance was of secondary importance. In 1978，the 3rd Plenary Session of the 11th Central Committee of the Communist Party of China made the major strategic plan for reform and opening-up，from which point China began its gradual transition from a planned economy to a market economy. At the same time，a variety of institutions began to emerge，contributing to the diversification of the financial system. The division between the central bank and professional financial service provider became clearer. In September 1983，the State Council issued the Decision on the People's Bank of China's Specially Performing the Function of the Central Bank，and since then，the People's Bank of China began to explore the establishment of a management framework for modern monetary policy regulation and control. After the 14th National People's Congress in 1992，in the process of establishing and improving socialist market economy，the financial sector underwent drastic reform，leading to the rapid growth of the financial system. After the promulgation of the Law on the People's Bank of China in 1995，a central bank system was basically formed in China，featuring the People's Bank of China independently implementing monetary policy under the leadership of the State Council. The monetary policy framework withstood internal pressure and external shocks such as the economic overheating in 1993，the deflation after the Asian financial crisis，accession to the WTO，and the 2008 global financial crisis，and has been improving under pressure and challenges. After the 18th National People's Congress in 2012，China's economy once entered a special “threefold period” featuring economic slowdown，restructuring and spillover effect from previous stimulus，when it faced a series of new opportunities and challenges. The landscape of the financial sector became more complicated than ever，with various new business models emerging，the shadow banking system evolving rapidly，credit creation activities becoming active and volatile，macro leverage ratios rising，and financial risks increasing. All these put forward new requirements to the monetary policy framework. As a result，marked by the 2017 National Financial Work Conference，a new round of financial reforms began，and the monetary policy framework entered a new round of adjustment and innovation.

Figure 2.1 Content of Monetary Policy Framework
Source：drawn by the author.