China’s current financial and monetary policies build on a foundation of extraordinarily rapid and successful reforms undertaken in the 1990s. Until the early 1990s the central government could not effectively control the national money supply; inflation oscillated wildly and at one point ran above 20%. China’s banks were in transition from serving as socialist ATM machines for the government to real banks making real loans and taking real risks. During that transition, their competence and the system’s ability to manage a tsunami of bad loans were in serious doubt. But by the end of that decade the People’s Bank of China had effective control of the money supply and inflation was firmly confined to (mostly low) single digits. The government had started the process of saving the banks by reforming their customers (the state-owned enterprises or SOEs), then recapitalized the banks, shifted their bad loans to asset-management companies, trained the staffs in market methods, brought in foreign strategic partners, and listed the banks on foreign and domestic stock exchanges.
Interest Rate Monetary Policy Banking System Commercial Bank Money Supply
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