What is the People's Bank of China (PBoC)?

The People's Bank of China (PBoC) serves as China's central bank and is the primary financial institution responsible for managing the country's monetary policies. Established in 1948, the PBoC has grown to become one of the most powerful central banks in the world. Headquartered in Beijing, the bank works to ensure the stability of the Chinese economy, support growth, and maintain the security of the financial system.

The primary responsibilities of the PBoC include controlling the money supply, regulating interest rates, managing foreign exchange reserves, and ensuring the stability of financial markets. In addition to these duties, the bank aims to improve the role of the yuan (CNY) in international trade by expanding China’s influence in the global economy.

In this article, we will explore the history, functions, operations, and global impact of the People's Bank of China in detail.

How the PBoC Works? The PBoC Organizational Structure

The People's Bank of China employs various tools and mechanisms to ensure the stability of China's economy and support the smooth functioning of its financial system by managing monetary policies and controlling foreign exchange reserves.

The operations of the PBoC are shaped by the specific responsibilities of its various departments:

• Monetary Policy Department: It sets interest rates, regulates the money supply, and implements strategic policies to balance economic growth and inflation.
• Foreign Exchange Management Department: This department manages foreign exchange reserves, controls the yuan’s value in international markets, and intervenes to prevent excessive fluctuations in exchange rates.
• Financial Stability Department: This department ensures the safety of the banking system by supervising financial institutions, identifying systemic risks, and taking preventive measures.
• International Cooperation Department: The department actively collaborates with international organizations such as the IMF and the World Bank to enhance China’s influence in the global financial system and strengthen international financial relations.
• Payment Systems Department: It ensures the secure and efficient operation of national payment systems and leads innovative projects, such as the development of digital yuan and new payment technologies.

History of the PBoC

The People’s Bank of China was established in 1948 and operated as the country’s sole bank at the time. In its early years, it undertook both central banking and commercial banking functions. However, with the development of China’s economy, these roles were separated, and the PBoC evolved into a modern central bank.

In 1978, with China’s economic reform initiatives, the role of the PBoC also underwent considerable changes. The bank introduced new regulations to support the transition to a market-oriented economy and took the lead in implementing more effective monetary policies. During this period, commercial banks were separated from the PBoC and became independent entities.

In 1995, the adoption of the Central Bank Law clearly defined the responsibilities and authorities of the PBoC. This law enabled the bank to conduct monetary policies independently and strengthened its role in maintaining China’s financial stability.

By the 2000s, the PBoC had become a more influential player in the global economy. Its efforts to increase foreign exchange reserves and expand the international use of the yuan significantly enhanced its strategic importance. In 2016, the yuan was included in the International Monetary Fund’s (IMF) Special Drawing Rights (SDR) basket, becoming a key global reserve currency.

The PBoC’s Duties

• The PBoC implements monetary policies to ensure the stability of China's economy by controlling the money supply and setting interest rates.
• The bank develops policies to maintain inflation at targeted levels and supports economic growth.
• It intervenes in foreign exchange markets to stabilize the yuan’s value in international markets and manages reserves.
• To ensure the safety of the financial system, the PBoC conducts supervision and regulatory activities over commercial banks and other financial institutions in China.
• During financial crises and market fluctuations, it provides liquidity to support economic stability.
• The bank ensures the secure and efficient operation of national payment systems through regulations and develops innovative payment solutions, such as the digital yuan.
• The PBoC collaborates with the IMF, World Bank, and other central banks to enhance China’s influence in the global financial system.
• It takes strategic steps to promote the yuan’s use as a reserve currency in international markets.

The PBoC’s Policies

In 2015, the PBoC devalued the official exchange rate of the yuan to maintain its competitiveness in international markets and support exports. This move was implemented to offset the economic slowdown in China.

The yuan’s value against the dollar fell by approximately 2%. This policy created significant volatility in the forex markets. It also had a substantial impact on global markets, as the yuan's value serves as an important indicator in global trade.

To manage and minimize the economic downturn caused by the COVID-19 pandemic, the PBoC implemented expansionary monetary policies. The bank reduced interest rates and lowered borrowing costs, enabling businesses and individuals to access liquidity more easily.

Large-scale credit packages were also introduced to support small and medium-sized enterprises. These policies helped the Chinese economy recover quickly from the pandemic and reduced uncertainties in global markets.

FAQs on People’s Bank of China

How do PBoC’s interest rate decisions impact the forex market?

When the PBoC raises interest rates, the yuan generally appreciates because higher interest rates are expected to attract foreign traders to the Chinese market. Conversely, lowering interest rates can lead to a depreciation of the yuan, which encourages exports while making imports more expensive.

How do PBoC’s currency interventions affect the yuan/dollar pair?

The PBoC intervenes in the currency market to stabilize the yuan’s value. For instance, if the yuan appreciates too much, the PBoC might sell yuan and buy dollars to lower the yuan’s value. Such interventions lead to fluctuations in the yuan/dollar pair, creating opportunities for forex traders.

How do changes in the yuan’s value impact other Asian currencies?

Changes in the yuan’s value particularly affect the currencies of countries that have significant trade relations with China. When the yuan appreciates, other Asian currencies generally depreciate because China’s trade advantage decreases. If the yuan depreciates, on the other hand, it often leads to an appreciation of other regional currencies.

What changes did the yuan’s inclusion in the SDR (IMF Special Drawing Rights) basket bring to the forex market?

The inclusion of the yuan in the SDR basket in 2016 established it as a global reserve currency. This development led to an increase in yuan-based transactions in the forex market and expanded the use of the yuan in international trade. Investors also showed greater interest in Chinese markets, and the yuan became a more liquid currency in forex trading.