Question

China conducts open market operations The People's Bank of China buys 20 billion yuan of government securities from ICBC The People's Bank of China (the central bank of China) indicated it would lower interest rates and inject 685 billion yuan ($105 billion) into the banking system Show how the transaction changes the balance sheets by filling in the numbers through open market operations People's Bank of China Assets billions of yuan Source: Bloomberg News, February 29, 2016 Liabilities In the open market operation described in the news clip, explain whether the People's Bank of China buys or sells securities billions of yuan Securities Reserves of ICBC The People's Bank of China securities because ICBC Assets billions of yuan Securities Reserves A. buys; an open market operation by definition is a purchase of securities B. buys; money is being injected into the banking system O C. sells; money is being injected into the banking system Liabilities llions of yuan D. sells; interest rates are falling >>> If the change is negative, include a minus sign. If the change is positive, do not include a plus sign

Answer 1

Ans 1) Option B

The People's bank of china buys securities as it needs to expand the money supply in the economy which is referred to as expansionary monetary policy.

In order to increase the money supply, the government of a country purchases the bonds and securities and gives money to banks in return.

Ans 2) When the bank of China buys securities worth 20 billion yuan, the value gets added as the securities on the asset side of the balance sheet.The same amount (20 billion yuan) gets included on the liabilities side as the reserves because the ICBC being a commercial bank would keep its reserves with central bank of china.

Balance sheet of People's bank of china

Assets Amt. Liabilities Amt

  Securities 20    Reserves of ICBC 20

  

Similarly, as ICBC bank sells securities, its securities get reduced by the amount of 20 billion yuan and reserves increase by the same amount.

Balance sheet of ICBC

Assets Amt Liabilities Amt

Securities - 20

Reserves 20