Continuing the Sound Monetary Policy

Dai Xianglong

Governor of the People's Bank of China

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 supply.

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 billion.

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 way.

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

1. 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.
2. 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.
3. 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.
4. 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.
5. 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 financing.