Therefore, the PBOC must believe there is room to increase liquidity in the economy.
Selling foreign reserves means the PBoC is raising demand for yuan denominated assets, fueling yuan strength.
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Beyond the PBOC, Chinese policymakers do not see the yuan as a tool to manage inflation.
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On one side of the discussion is the People's Bank of China (PBOC), the country's central bank.
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In October, the PBOC raised the benchmark one-year deposit rate to 2.5%, the first hike since December 2007.
The 17 largest of them, according to the PBOC, expanded their loan portfolios by a stunning 34.9% that year.
Commissions charged for third-party payment services would also be subject to PBOC approval.
The PBOC administers the country's exchange-rate policy, but it does not make it.
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The announcement came less than two weeks after the PBOC had raised interest rates for the second time this year.
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"This constrains the PBOC's ability to express itself more effectively, " said Qinwei Wang, China economist at London-based research firm Capital Economics.
The PBoC has been clamping down on property markets to contain prices.
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This is the first time that the PBOC has cut bank reserve levels in three years, signaling a decisive shift in monetary policy.
The PBOC added a record 290 billion yuan into the banking system on October 30 and almost 1.3 trillion yuan since late June.
The PBOC also raised reserve requirements on banks six times in 2010, obliging them to set aside 18.5% of their deposits, a record ratio.
Then, too, the PBOC reports purchases infrequently over the years.
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PBOC's reserve-requirement ratio has been raised five times since July 2006.
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This was the first time that the PBOC had cut bank reserve levels in three years, the first signal that monetary policy in China is changing.
At the same time, the PBoC has eased reserve requirement rations (RRR) and could probably do so twice more this year, and pushed commercial banks to lend.
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When inflation, primarily caused by rising food prices, began to surge upwards in the latter half of the year, the PBOC continued its tightening policies to combat inflation.
Prior to 2002 all gold orders went through the PBOC.
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China's interest rates are below the inflation rate, but the PBOC fears that higher rates would attract yet more hot money and so end up adding to inflationary pressures.
Chinese families put as much 58% of financial assets in bank deposits, followed by 18% in cash at home, 15% in stocks, and 4% in funds, according to the PBOC report.
Yesterday, however, the PBoC told Alipay competitor Tenpay (controlled by Tencent) that their VIE structure was invalid, causing a great deal of worry for them of the future of that business.
At the moment, the PBOC issues long quarterly reports on monetary policy, often couched in general terms, but its efforts to communicate are far more sparse than at other central banks.
These reporting and operational requirements work off the back end, ensuring that PBOC has enough information to perform adequate oversight and that these firms are conducting business in the proper fashion.
On the other hand, the PBOC is conducting aggressive open market purchases of dollars to hold down their yuan, which is naturally increasing their domestic money supply and offsetting their tightening measures.
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But if the PBOC takes those dollars out of the market altogether and holds them in cash reserves, then that is effectively keeping dollars in Treasurys and not converting them to RMB.
In June, the PBOC announced that banks will be allowed to offer loans at interest rates up to 20 percent below the benchmark rate and be free to pay savers a rate up to 10 percent above the ceiling rate.
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