Even with a single control, the United States faces monetary problems, but when a country has multiple controls to regulate its currency, then the chaos will also increase proportionately.
The PBOC is the Central Bank of China. But it is not the ultimate policymaker, unlike the Federal Reserve of the United States.
The PBOC controls the interest rates and money supply through multiple methods.
In the United States, the markets are affected by the borrowing costs and the interest rates by the Federal Reserve. The exchange rates are determined by the Federal Reserve. However, in China, there is no single policy maker and the investors do not have a single benchmark to follow.
Interest rates in China are controlled by multiple tools that the central bank uses. Further new tools are introduced and old tools are done away with when the country decides to modernize its financial outlook.
In such a scenario, investors are not able to follow the trend of its central bank.
The People’s Republic of China has a few tools up its sleeve to take care of its monetary policy.
The Open Market Operation is one such tool, by which it can introduce or remove liquidity from the country.
The Reserve Requirement Ration is the compulsory reserve that banks must hold as per instructions from PBOC.
The PBOC has other tools like Benchmark Interest rates, Rediscounting of loans, Standing lending facility, Pledged Supplementary Lending, by which it controls the country monetary policy.
A new tool used to take care of the monetary policy is supplementary lending, which has been introduced recently in China.
Apart from these functions, the PBOC should keep the Chinese currency, Yuan, stable against the other currencies such as the Euro, The US dollar, the South Korean won and the Japanese yen.
As multiple methods are used to control the economy, investors are sometimes confused to track signals from the Chinese Central bank.