Rethinking Monetary and Financial Policies in China

There is partial consensus that the size of money — or liquidity — in China should be large reflecting the high savings rate. Even so, with a sense of a liquidity overhang from the recent monetary expansion, many caution against expanding liquidity further lest it translate into a property bubble. Instead, they argue for ways to speed up the circulation of liquidity — in other words to raise velocity — to stimulate the real economy. The recent growth of the non-banking system adds to these concerns, and has been criticized as falling short of promoting effective financial intermediation. Some even claim that the monetary authorities may be losing control over the growth of key monetary aggregates. Against this background, this paper reviews recent monetary developments in China and considers how monetary aggregates and the financial system may have to change to support the rebalancing of the economy.