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developed the primary bill market to include 52 dealers, including banks securities companies, insurers, rural credit co-operatives etc. PBC bill auctions use both volume- and rate-based bidding. The PBC is reported to have a dedicated OMO trading room managed by the PBC’s Monetary Policy Division.Box 1 below. At first the PBC only engaged in one OMO a week. In the early days, cash bond trading was the most common means of adjusting the monetary base. After a short period, this was replaced by bond-based repo transactions since these had the advantage vis-à-vis bonds of affecting money market rates (and not impacting on the bond market). On June 25th 2002 the central bank started using reverse MoF- bond-based repos to cope with new FX inflows. However, by September 2002, the PBC had run out of bonds upon which to make repo transactions. To resolve this, the central bank determined that all outstanding repo contracts issued between June 26th and September 24th would not be honoured as such, but would be converted into a new instrument, PBC bills. The conversion resulted in bills worth CNY193.8bn (USD23.3bn), which appears on the central bank’s balance sheet in September 2002. The first auction of ‘new’ central bank bills took place in May 2003 and since then the market has grown substantially. From February 25th 2003, the central bank has engaged in two (or more) OMOs a week.It has also developed a liquidity management system, which now provides a daily update on banks’ liquidity positions.Table 1 summarises the PBC’s OMOs since 1998 (China Financial Stability Analysis Group,2005).
Table 1: Open market operations 

Released base  Withdrawn base  Net base  money effect 

Source: PBC Monetary Policy Reports, Author, Shui and Sun (2003)
Second, the discount rate, the rate at which the PBC lends into the money market. On March 25th 2004, the PBC introduced ‘floating rate’ central bank rediscount lending. In other words, the PBC now has right to set the discount rate without having to seek State Council permission each time. At the same time, the PBC added 63 bps to the benchmark discount rate for financial institutions, and 27 bps to the standard rate to take the central bank’s core rediscount rate to 3.24%. Floating rate rediscount lending will be phased in over three years for the rural credit co-operatives （Financial Stability Analysis Group, 2007).
Third, the reserve requirement. The PBC reduced this ratio in the late 1990s as table 2 shows, in an attempt to stimulate credit growth and to give the banks more flexibility in how they managed their funds. At the same time, the central bank has steadily reduced the rates it pays on reserves, both required and excess, as table 3 shows, in an attempt to encourage banks to lend into the money markets rather than place their excess funds on deposit with the central bank. On April 25th 2004, the PBC adopted a differentiated reserve ratio system, meaning that second-tier banks, with capital adequacy ratios or asset quality etc. below certain standards would have to hold 8% reserves (compared to the standard level of 7.5%). Rural and urban credit co-operative were exempted from this rule for the time being. Ma and McCauley (2004) note that by mid-2004, 38 second-tier banks were subject to the new higher level, affecting about 10% of deposits in the system (Financial Market Department of the PBC,2006).
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