Further comments on Guonan Ma "A compelling case for Chinese monetary easing", 14/07/2015
I think some of China’s monetary policy approaches are innovative. For example, the differential treatments of first home buyers and other property buyers is a good example, as I mentioned earlier. The People's Bank of China (PBoC), China's central bank, has used different requirement of Loan Value Ratios (I am not sure it also applied differential rates) for the two different buying groups.
I would suggest that the central bank could charge a non-zero interest rate to commercial banks for home loans for non-first home buyers. That can regulate the property market and at the same time acts as a revenue to the country as opposed to let commercial bank to reap the benefits of higher rates applied to non-first home buyers.
Secondly, the use of reserve ratio, though it has been available to the monetary authorities but seldom used in the west advanced countries, provides another flexibility in applying monetary policy. That is because the monetary authority can maintain a particular target interest rate and at the same time to regulate the level of money supply.
Having said that, I would caution that the Chinese monetary and fiscal authorities in unduly intervening in the market activities, such as the authorities’ words and actions in the stock market over the last year and including the most recent interventions to proper up the market. The government and monetary authorities should not be in that market in that way.
In summary, the addition of additional tools or the allowance of more flexibilities in the monetary policies in China should be studied for the more widespread application of the better ones.
In response to Guonan Ma's reply on 15th July, 2015, 10:43 am: "To Lintong Feng: Policy issues involved are multiple in China. A threshold question is whether Chinese monetary policy stance should become less restrictive. Then the next question is what tools should be matched with which particular targets. The issue you raised hence relates more to the choice of instruments. In principle, the Chinese government might also tax mortgage for the second or third homes rather than regulating their mortgage rates, especially in a more liberalised environment."
Thanks Dr Ma for your reply.
I agree with your point on an easing monetary stance in China.
My argument for the imposition of an interest rate on the banks from the PBoC is effectively a tax in nature. I think we are on the side of that argument. There is no disagreement between us on that.
The PBoC may be relatively better positioned to initiate and enforce the "tax" as part of its monetary policy tools than the Department of Finance or the Taxation Bureau. In fact, monetary authority should probably have the responsibility for the health of asset markets, i.e. preventing bubbles and the so called exuberance (is it the correct word that the former Chairman of the Federal Reserve, Alan Greenspan used?)