ANALYZING CHINA'S MONETARY POLICY: A PRE- AND POST-US TRADE WAR PERSPECTIVE

Abstract

This study examines the evolution of China's monetary policy before and after the trade war with the United States, with a particular focus on interest rates and the money supply. Employing Granger causality tests on data spanning from January 2015 to May 2021, we evaluate the effectiveness of these monetary instruments on various economic variables. The analysis of the pre-trade war period (2015-2017) reveals that both interest rates and M2 had limited impacts, while the exchange rate exerted a significant influence. Conversely, during the post-trade war period (2018-2021), interest rates remained ineffective, whereas M2 notably affected exports and imports, indicating a strategic policy shift by Chinese authorities. This shift is attributed to M2's adaptability in responding to external shocks, coupled with the structural characteristics of China’s financial system. Based on these findings, we recommend several policy measures: enhancing interest rate transmission mechanisms, utilizing M2 for dynamic liquidity management, and improving the coordination between monetary and fiscal policies. Additionally, effective inflation management and fostering international cooperation are deemed essential. The implementation of these strategies is expected to strengthen China's monetary policy framework, facilitating improved management of external economic shocks and promoting a stable economic environment.