Monetary Policy Needs to Keep up with the Times

Since the start of reform and opening in the late 1970s, China's monetary operation has undergone dramatic changes. The J-curve of Chinese monetary aggregate (total quantity growth) over the period between 1978 and 2005 illustrates the changes in total quantity growth, while the changes in monetary structure are shown by an X-curve, and are attributed to the increased ratio of money in circulation to savings (money serving as a store of value) from 6:4 to 4:6. Therefore, the key factor in maintaining supply-and -demand equilibrium in monetary supply has shifted from the supply side to the demand side. The monetary aggregate has influenced the decrease in commodity prices. However, composite prices including assets, reflect the equilibrium of monetary supply and demand. In the face of the changes in Chinese monetary operation, attention should be given to inflation pressure and highly concentrated financial risks in the banking system, and the regulation of monetary demand should be emphasized. The regulation of monetary aggregate and monetary structure are both of vital importance.