Neutralization in China: evidence from the balance sheet of the People’s Bank of China

Zhuo Tan and Shenggang Yang

Journal of Economic Policy Reform, 2012, vol. 15, issue 1, 25-31

Abstract: We evaluate China’s neutralization policy by monthly estimations based on the central bank balance sheet from 1999:6 to 2011:6. Our results suggest that China effectively neutralizes 66% of the change of net foreign assets under a pegged currency regime. Consequently, a purchase of one yuan of net foreign assets leads to an effective increase of 1.4 yuan in the money supply, rather than 4 yuan in the absence of neutralization. In the face of rapid growth of foreign reserves, neutralization in China is becoming increasingly difficult, consistent with Mundell’s hypothesis.

Date: 2012
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DOI: 10.1080/17487870.2012.647776

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