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Continuing the Sound Monetary Policy (July 19, 2000)

The active fiscal policy and sound monetary policy adopted in 1998 have achieved
remarkable results. The first half of this year saw significant improvement in
the macroeconomic performance as evidenced by the strengthening of economic
growth, the recovery in the general price level, and the smooth growth of money
Since the beginning of the year, the People's Bank of China (PBC) has
strengthened the role of monetary policy in facilitating economic growth.
Associated measures include the introduction of procedures on education loans by
financial institutions and access of securities firms to borrowing secured by
their stock holdings. The central bank lending increased by RMB150 billion yuan
during the first six months (the increase was RMB200 billion larger than in the
corresponding period of the previous year). The acceleration of the financial
reform, the improvement in the credit structure, the strengthening of financial
supervision and the reduction in non-performing loans have all contributed to
the positive turnaround in the performance of the financial sector and the
pickup in economic growth.
The smooth growth of money supply, steady month-on-month increase in liquidity,
and the desirable magnitude of cash reflow to the financial system. At the end
of June, broad money (M2) amounted to RMB12.7 trillion, up 13.7 percent while
demand deposits and currency in circulation (M1) to RMB4.8 trillion, up 23.7
percent, exceeding the sum of real GDP growth and CPI by 5.4 and 15.4 percentage
points respectively. The aggregate corporate deposits amounted to RMB4.07
trillion, up RMB364.5 billion from the beginning of the year. The increase,
which was nearly RMB270 billion larger than in the corresponding period in 1999,
indicated the strengthening of corporate payment capacity and economic activity.
The significant increase in loans accompanied by improvement in loan structure.
The aggregate local currency loans by financial institutions increased by 13.8
percent or RMB620.4 billion during the first half of the year. The increase,
which reflected a steady acceleration, was RMB197.2 billion larger than that of
the same period of 1999. The increase of short-term loans was RMB160 billion
larger while that of medium- and long-term loans over RMB40 billion larger. The
outstanding household mortgage loans totaled RMB213 billion at end-June, up
RMB66 billion from the beginning of the year. In the first five months,
commercial housing sales grew by more than 40 percent in terms of space. About
88 percent were sold to individuals. The outstanding education loans, automobile
loans and other consumer loans amounted to RMB41.1 billion at the end of June,
up RMB16.2 billion.
The foreign currency deposits at the domestic financial institutions totaled
USD113.7 billion at the end of June, up USD10.5 billion from the beginning of
the year. The balance included USD63.4 billion by individual depositors, up
USD8.1 billion. Foreign currency loans amounted to USD69.8 billion, down USD2.1
The reasonable diversion of household deposits and the increasingly brisk stock
market. The balance of household deposits totaled RMB6284.2 billion at the end
of June, up RMB348.7 billion from the beginning of the year. The increase was
RMB231.8 billion smaller than that of the same period in 1999. The slowdown in
household deposit growth was mainly attributable to the interest rate cuts, the
attractiveness of government securities, the robust stock market and the
recovery in consumption as well as the application of income tax to interest
earnings and the introduction of the real depositor name requirement. On the
whole, the reasonable diversion of household deposits has been a result of
macroeconomic adjustment and is conducive to expanding consumer and capital
markets. Financing from stock market totaled RMB82.3 billion in the first half
of the year, RMB48 billion more than that of the same period of 1999.
The smooth implementation of financial stabilization measures and the steady
development of financial institutions. The four asset management companies had
taken over RMB1.3 trillion of non-performing loans from the four wholly
state-owned commercial banks by the end of June and the transfer procedures have
been completed for 71 percent. The debt-equity swap procedures have been
completed for 90 percent of corporate loans recommended by the State Economic
and Trade Commission for such swap transactions. The work on rectifying
financial institutions and cleaning up rural cooperative funds is well under
The further strengthening of financial supervision and the adequate payment
capacity of commercial banks. The PBC branches have organized more than 50,000
man/visits to examine the asset quality and verify the profit and loss
statements of over 38,000 financial institutions and affiliates. The aim was to
strengthen the internal control of commercial banks. The wholly state-owned and
other commercial banks are highly liquid, with excess reserve ratios of 7.8
percent and 19.1 percent respectively at the end of June.
The further opening of the financial sector, the continued build-up of foreign
exchange reserves and the stable exchange rate. The total assets of foreign
banks reached USD32.3 billion at the end of June, including USD20.8 billion
loans. The number of foreign banks with access to local currency business in
Shanghai and Shenzhen reached 32. These institutions are also allowed to provide
services to their customers in the neighboring provinces such as Jiangsu,
Guangdong, Guangxi and Hunan. The state foreign exchange reserves reached
USD158.6 billion at the end of June, up USD3.9 billion from end-1999. The
renminbi exchange rate showed a slightly upward trend.
The authority is still facing a number of challenges in the financial sector.
The constraints to monetary policy transmission have not been eliminated. The
banking sector is still constrained by the risks associated with the high ratio
of non-performing loans resulting from the high indebtedness of the corporate
sector. The commercial banks need to improve their incentive structure and
internal control. There is a need to develop a sound credit culture to address
the widespread deliberate debt delinquencies.
The PBC will continue to pursue the sound monetary policy while maintaining
stability, continuity and flexibility of monetary policy. It will improve the
monitoring of money growth to facilitate strategic structural improvement of the
economy and sustain the growth momentum. The PBC's policy and structural
measures will aim at
Balancing the need to prevent financial risks and the need to promote
economic growth through maintaining appropriate growth of money supply. M1
and M2 are projected to grow by about 20 percent and 14 percent for the year
while the increase in loans is expected to exceed RMB1 trillion.
Improving the market-based financial regulatory system. Efforts will be made
to accelerate market-based interest rate reform and develop an interest rate
system where the deposit and lending rates of financial institutions will be
determined by the market, with the central bank lending rate as the
benchmark and the money market rate as an intermediate rate. A flexible
foreign currency interest rate policy responsive to changes in international
financial markets will also be established. The floating margins of the
lending rates for financial institutions, especially rural credit
cooperatives, will be further widened.
Improving monetary policy transmission mechanism and efficiency of financial
intermediation. Procedures for evaluating the performance of the wholly
state-owned commercial banks will be formulated to encourage the development
of incentive and discipline mechanisms. The PBC will improve the systems of
accounting, loan loss provision and write-off for commercial banks. It will
encourage banks to develop new products and services and expand business.
Improving economic structure through financial intermediation. The
authorities will continue the work on debt-equity swap and promote the
transformation of enterprises. While promoting the reform and development of
the state-owned enterprises, the PBC will supervise credit to state-owned
enterprises, improve the operations of finance and leasing companies, and
support the technological development of enterprises. Financing to small and
medium-sized businesses and private investment will also be encouraged.
Improving financial services to support the development of the central and
western regions. More credit, including parallel loans for projects financed
with government debt, will be provided for infrastructure development in
those areas. Reasonable diversity will be necessary in selecting projects
for financing to give access of environmental projects to bank credit. The
financing capacity of the financial institutions in the central and western
regions will be enhanced through greater use of central bank lending and
rediscount facilities. Easier licensing procedures will be applied to
foreign financial institutions wishing to expand their presence into those
regions so as to increase the access of those regions to international

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