RDP 2019-11: China's Evolving Monetary Policy Framework in International Context 4. Communication

Communication has become a primary lever of monetary policy in modern day central banking. But this is a relatively recent phenomena. In 1987, the year he was appointed Chair of the Board of Governors of the Federal Reserve System, Alan Greenspan observed: ‘Since I've become a central banker, I've learned to mumble with great incoherence. If I seem unduly clear to you, you must have misunderstood what I said’.^[33] Though not an isolated view at the time, clear communication now features prominently in monetary policy strategy and implementation. Long gone are the days of ‘never explain, never excuse’, as put by the Governor of the Bank of England, Montagu Norman (1920–44).^[34] Contemporary approaches are wideranging, including low-frequency communication over policy frameworks and objectives, and higher-frequency communication over current macroeconomic conditions, forecasts, risks and the rationale for policy decisions. They take place across a variety of mediums, not limited to press conferences, speeches, periodic publications and social media.

As with many elements of its monetary policy framework, the PBC's communication framework has evolved significantly over the past decade or so. Like advanced economy central banks, the PBC has emphasised a commitment to continuously improving its communication, in part recognising the importance of guiding market expectations as a conduit of monetary policy transmission (PBC 2018).

Some of the similarities in the PBC's approach to communication vis-à-vis advanced economy central banks (Table 8) can be characterised as follows:

• Monetary Policy Report – publication of the PBC's quarterly ‘Monetary Policy Report’ commenced in 2001 and provides context for recent monetary policy decisions. It covers analysis of output, prices, and money supply developments and presents information about important sectors of the economy. More forward-looking and technical content is gradually being introduced.
• MPC meeting press releases – MPC meetings take place around the end of each quarter. Since 2009 they have generally been followed by short press releases, and can stylistically take the form of meeting minutes on occasion.
• Speeches and press conferences – PBC officials now regularly give speeches at public conferences and international central bank fora. Governors and senior PBC staff are available to speak to journalists. The Governor and Deputy Governor gave an annual average of eight speeches between them in the period 2007–17, around two-thirds of which were delivered by the Governor. Of the 140 press conferences during the same period (on average, 13 per year), the Governor fielded questions or gave interviews in about one-fifth of them (McMahon et al 2018). Oral communication picked up noticeably in 2015–16, when important policy changes took place in response to a period of heightened financial market volatility.
• OMO notices – to better explain the rationale for OMO, daily notices have become standard since January 2016. Increasingly, these notices provide contextual information.
• Upgraded communication functionality – the PBC has also enhanced the functionality of its multilingual website and increased use of a social media platform (Weibo, China's Twitter equivalent) to convey information. There are now six times more social media followers of the PBC than either the US Federal Reserve or European Central Bank (McMahon et al 2018).

Nevertheless, PBC communication also retains some important differences compared to advanced economy central banks. These result largely from the PBC's position in the broader sweep of China's political and policymaking bodies, which constrain its communication in several ways:

• Forecasts – while all major central banks publish quarterly forecasts over horizons of two to four years, the PBC does not.^[35] Instead, the targets for monetary policy, which are not set solely by the PBC, are sometimes interpreted as quasi-forecasts.
• Forward guidance – the PBC is constrained in offering forward guidance (either calendar- or threshold-based) as it does not have full autonomy over monetary policy decisions. The State Council also regularly approves the wording of the monetary policy stance. Moreover, communication generally still has a contemporaneous or backward-looking orientation.
• Unexpected monetary policy deliberations – monetary policy discussion dates (outside of quarterly MPC meetings) are not announced ahead of time, but rather are posted to the PBC's website ex post. This can impede the efficient pricing of financial market securities.
• Intermediate target – there is no publicly announced intermediate target, in the form of a widely known nominal anchor that is operationalised with a consistent numerical value.
• Reaction function – as per forward guidance, it is difficult for the PBC to communicate with clarity over its reaction function, reflecting the absence of instrument independence in addition to the changing emphasis on intermediate targets and the multiple objectives set for monetary policy (including how they interact in times of trade-offs).
• Instruments – the plethora of interest rate instruments can make it difficult to clearly communicate to the public the overall stance of monetary policy.
• Window guidance – in addition to written and oral communication disseminated publicly, the PBC frequently avails of (non-public) window guidance to financial institutions, which can relate to credit growth, lending to priority sectors, and so on.
• Timely information – the release of timely information has improved but some challenges remain. Uncertainty surrounds the dates of key monetary policy decisions, and press releases for quarterly MPC meetings occur one or two days after the meeting. Meeting minutes are not released to the public. The release of timely information can be especially delayed when it comes to communication in English.
• Public testimony – while a key component of public accountability for advanced economy central banks involves senior officials publically testifying before elected officials, this does not occur in China.

As China's monetary policy framework seeks to more actively guide public expectations, effective central bank communication is becoming more important. The PBC's communication strategy has been significantly upgraded over recent years, but there are institutional constraints on it operating with the full potency enjoyed by central banks elsewhere.

Footnotes

As quoted in the Wall Street Journal (Murray 1987). [33]

As Bernanke (2007) noted:

Norman's aphorism exemplified how he and many of his contemporaries viewed the making of monetary policy – as an arcane and esoteric art, best practiced out of public view. Many central bankers of Norman's time (and, indeed, well into the postwar period) believed that a certain mystique attached to their activities and that allowing the public a glimpse of the inner workings would only usurp the prerogatives of insiders and reduce, if not grievously damage, the effectiveness of policy. Norman's perspective on central banking now seems decidedly quaint.

[34]

The PBC's research bureau briefly experimented with publishing GDP forecasts in the mid 2010s but this practice was discontinued shortly thereafter. [35]