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Chapter 28 Central banks: the "nerve centers" of the financial system (3)
Flexible open market operations
In 1913, the United States established the Federal Reserve System to assume the functions of the central bank, but the Congress at that time did not allocate funds, so the Federal Reserve System had to fend for itself.Initially, the Federal Reserve Bank earned interest by issuing discounted loans to its members.However, due to the recession of 1920 and 1921, the amount of discounted loans fell sharply, and the Federal Reserve System had to find another way to make money, so it began to buy bonds and earn interest.Over time, the Federal Reserve found that when it bought bonds from commercial banks, the reserves in the hands of commercial banks increased. Through the deposit creation mechanism, their deposits doubled and the money supply increased.It's really unintentional.So the Fed realized that it had found a simple and effective tool for socketing the money supply.By the end of the 20s, this tool had become an important "magic weapon" of the Federal Reserve, and it is still the most commonly used monetary policy tool by central banks around the world to this day.

Open market operations (open market operations) are the central bank's main monetary policy tool to regulate market liquidity, through which the central bank conducts securities and foreign exchange transactions with designated dealers to achieve monetary policy regulation goals.

The open market operation of the People's Bank of China includes two parts: RMB operation and foreign exchange operation.

When there is a shortage of funds in the financial market, the central bank buys securities through open market operations and injects a base currency into the society.If these basic currencies flow into the hands of the public, it will directly increase the money supply of the society, and if they flow into commercial banks, it will cause the expansion of credit and the multiple increase of money supply.On the contrary, when the financial market is flooded with capital and there is too much money, the central bank can sell securities through open market operations. No matter whether these securities are purchased by commercial banks or other departments, there will always be a corresponding amount of base currency The flow back causes the contraction of credit scale and the reduction of money supply.The central bank achieves the purpose of expanding or contracting credit and regulating the money supply through securities trading activities in the open market.

Open market operations are a major activity of central banks and a fundamental tool of monetary policy.The purchase or sale of securities or foreign exchange by the central bank means the throughput of the base currency, which can achieve the purpose of increasing or reducing the money supply.

The foreign exchange open market operation was launched in March 1994, and the RMB open market operation resumed trading on May 3, 1998, and the scale gradually expanded. Since 5, open market operations have become an important tool for the daily operation of the People's Bank of China's monetary policy, and have played a positive role in regulating the money supply, regulating the liquidity level of commercial banks, and guiding the trend of interest rates in the money market.

At the beginning of 2008, China's stock market and real estate market experienced overheating investment one after another, and the price level was high.The central bank started its first open market operation in early February, with a net withdrawal of 2 billion yuan of funds, and the intensity of open market operations has remained unabated since then. In late February, the People's Bank of China issued another 2960 billion yuan of one-year central bills in open market operations, a decrease of 2 billion yuan from the previous week, but it remained at a high level since 600, and the issuance rate continued to remain flat.At the same time, the central bank also carried out two positive repurchase operations, namely 1-day and 150-day positive repurchase operations, with a total transaction volume of 2008 billion yuan. In this way, the central bank has withdrawn 28 billion yuan of liquidity within one day. .

As the next stock market will usher in the issuance of another large-cap stock——China Railway Construction, and the central bank’s open market operations at that time still maintain a high level of tightening, which shows the determination of the central bank to withdraw liquidity and strengthen market confidence. .

Flexible open market operations are one of the central bank's important policy tools, and they play a very powerful role.The People's Bank of China began to establish the primary dealer system for open market operations in 1998, and selected a group of commercial banks that can undertake large-value bond transactions as trading partners for open market operations. Currently, there are 40 primary dealers for open market operations commercial Bank.These dealers can use treasury bonds, policy financial bonds, etc. as trading tools to carry out open market business with the People's Bank of China.

In terms of transaction types, the open market business bond transactions of the People's Bank of China mainly include repurchase transactions, spot bond transactions and issuance of central bank bills.Among them, repurchase transactions and spot bond transactions both refer to the operation of the central bank to purchase or release securities.Central bank bills refer to short-term bonds issued by the People's Bank of China. The central bank can withdraw base money by issuing central bank bills, and the maturity of central bank bills is reflected in the release of base money.For example, if the central bank issues 1000 yuan of bonds to banks or the non-bank public, the base currency will decrease by 1000 yuan.Because the central bank uses bonds to exchange cash, and the public exchanges cash for bonds, then the central bank loses 1000 yuan in bond assets.Due to the return of cash, the currency liabilities are reduced, that is, the currency in circulation is reduced by 1000 yuan.Therefore, the result of this open market operation of selling central bank bills is that the base currency in circulation decreases correspondingly, while the central bank's reserves remain unchanged accordingly.Therefore, open market operations are mainly aimed at controlling the base currency.

Hedging foreign exchange holdings is the basic function of open market operation business.Occupation of foreign funds is a highly professional concept, which refers to the domestic currency that the bank purchases foreign exchange assets and correspondingly releases.As a financial asset, the increase of foreign exchange reserves is tantamount to the injection of base currency.The more foreign exchange reserves increase, the faster the RMB issuance will grow.Because the official reserve is purchased and held by the monetary authority, its corresponding reflection in the accounts of the monetary authority is foreign exchange appropriation. The increase in foreign exchange appropriation directly increases the amount of base money, and through the currency multiplier effect, it creates a currency A substantial increase in supply.In addition to the basic function of hedging foreign exchange holdings, open market operations have always been the leading indicator of the central bank's monetary policy, often conveying the central bank's intention to regulate interest rates in the money market, and reflecting the central bank's monetary policy trend in the future.

The rediscount of "sending charcoal in the snow"

On September 2001, 9, a few hours after terrorists crashed the World Trade Center in New York, although Greenspan, who was meeting in Switzerland, was still unable to return to the United States because of the no-fly order, the Federal Reserve Board immediately announced the Banks across the United States ship cash to guarantee the bank's payment, the discount policy.In order to ensure the normal operation of the entire U.S. banking system and financial institutions, the Federal Reserve has supplemented the U.S. banking system with special temporary reserve funds of 11 billion U.S. dollars the day after the terrorist attack; on September 382, the U.S. Federal Reserve Board once again Loans to commercial banks through open market operations amounted to US$5000 billion, equivalent to 9 times the total amount of loans to commercial banks in the three days before the terrorist incident.

And so, far from what the terrorists and pessimists expected - a potentially dire payments crisis was successfully resolved before it even had a chance to emerge - in In the most difficult first 30 days after the outbreak of the crisis, in the United States, no city suffered a run, no bank collapsed because of the payment crisis, and no bank even encountered payment difficulties.Undoubtedly, this series of miraculous actions saved the hard-hit US economy at the most dangerous moment.Therefore, we cannot but see that the central bank's rediscount policy "send charcoal in the snow" to the market has sent confidence and warmth.

The rediscount policy was one of the earliest monetary policy tools used.It is the behavior of the central bank to provide financing support to commercial banks by buying discounted but not yet mature commercial bills held by commercial banks.The rediscount policy is the earliest monetary policy tool owned by the central bank.The central banks of many modern countries use rediscount as a major monetary policy tool to control credit. Rediscount means that commercial banks or other financial institutions transfer undue bills obtained by discounting to the central bank.For the central bank, rediscounting means buying bills held by commercial banks, outflowing real money, and expanding money supply.For commercial banks, rediscount is to sell discounted bills to solve the temporary shortage of funds.The entire rediscount process is actually the process of buying and selling bills and transferring funds between commercial banks and the central bank.The so-called rediscount policy is a financial policy in which the central bank intervenes and affects the market interest rate and the supply and demand of the money market by formulating or adjusting the rediscount rate, thereby regulating the money supply in the market.

The interest rate charged by the central bank for discounting loans to commercial banks is called the rediscount rate.Generally, when the economy has excessive demand and inflation, the rediscount rate is raised; and when the economy has weak demand and production declines, the rediscount rate is lowered.

The level of the rediscount rate directly determines the level of the rediscount amount, and indirectly affects the rediscount demand of commercial banks, thereby affecting the overall rediscount scale.On the one hand, the level of the rediscount rate directly determines the rediscount cost, and the increase in the rediscount rate will naturally affect the rediscount demand, and vice versa; on the other hand, the change in the rediscount rate reflects the central Therefore, the bank's policy intention has a notification effect: raising the rediscount rate shows the intention of tightening, and vice versa, showing the intention of expansion, which has a more obvious guiding effect on short-term market interest rates.Therefore, the rediscount rate should not be changed frequently, because it will give people the impression that the policy intention is not clear, making commercial banks at a loss.

The rediscount rate will also have a certain impact on the overall level of interest rates.

Of course, whether the effect of the rediscount policy can be played well depends on the flexibility of the money market.Generally speaking, commercial banks in some countries mainly rely on the central bank to finance funds, and the rediscount policy has greater flexibility in the currency market, and the effect is greater. The smaller the elasticity in the money market, the smaller the effect.The rediscount policy also has its limitations.From the perspective of controlling the money supply, the rediscount policy is not an ideal control tool.First, the central bank is in a passive position.Whether commercial banks are willing to apply to the central bank for discounting, or how much to discount, depends on commercial banks. If commercial banks can raise funds through other channels without relying on rediscounting, the central bank cannot effectively control the money supply.Second, increase the pressure on the central bank.If commercial banks rely on the central bank to rediscount, this increases the pressure on the central bank, thereby weakening the ability to control the money supply.

Thirdly, there is a limit to the level of the rediscount rate, and no matter how high or low the rediscount rate is during economic prosperity or depression, it cannot restrict or prevent commercial banks from rediscounting or borrowing from the central bank, which also makes it difficult for the central bank to effectively control the currency Supply.From the perspective of the impact on interest rates, adjusting the rediscount rate usually cannot change the structure of interest rates, but can only affect the level of interest rates.Even if the interest rate level is affected, two assumptions must be met: first, the central bank is ready to freely provide loans at its prescribed rediscount rate at any time, so as to adjust the amount of lending to commercial banks; increase profits, and are willing to borrow from the central bank.When the market interest rate is higher than the rediscount rate, and the interest rate difference is sufficient to cover the risks and lending management costs, commercial banks will borrow from the central bank and then release it; When the above-mentioned costs are reduced, commercial banks will withdraw their loans from the market and repay their loans to the central bank. Only under such conditions can the central bank's rediscount rate dominate the market interest rate.This is often not the case in reality.These factors determine that the rediscount policy is not an ideal monetary policy tool, but despite this, the adjustment of the rediscount rate still has a wider impact on the money market.

The mighty and powerful "deposit reserve ratio"

The People's Bank of China decided to raise the RMB deposit reserve ratio of deposit-taking financial institutions by 2007 percentage points starting from February 2, 25.The People's Bank of China promises to continue to implement a prudent monetary policy, strengthen the liquidity management of the banking system, guide the reasonable growth of money and credit, and promote the sound and rapid development of the national economy.This has also been effectively reflected in 0.5.

Since 2006, the central bank has used a variety of monetary policy tools to vigorously recover excess liquidity in the banking system, and has achieved certain results.Among them, the deposit reserve ratio has been continuously raised, which has largely recovered excess liquidity and greatly consolidated the effectiveness of macro-control. In 2006, the central bank raised the deposit reserve ratio three times:
1.7. On July 05, the RMB deposit reserve ratio of deposit-taking financial institutions was raised by 0.5 percentage points.

(End of this chapter)