The People's Bank of China yesterday announced that M2 - a key measure of money supply including cash in circulation and deposits - as of the end of March was up 18.5 percent from the previous year.

The rate, compared to 16.8 percent in 2002 and 14.4 percent in 2001, indicates that the increase in the supply of money is on target to meet the 2003 goal announced by new central bank chief Zhou Xiaochuan.

The central bank said in a press release that "the current money supply is sufficient," noting the rate of M2 growth is much higher than the gross domestic product (GDP) growth rate and price index rate combined.

China's GDP is estimated by analysts to have grown by 9 percent during the first quarter, with the growth of the benchmark consumer price index hovering around 0.5 percent.

Chinese policy makers traditionally compare the money supply growth rate with the sum of the economic growth rate and price index rate to evaluate the level of the nation's money supply - with the money supply growth rate to be maintained several points higher when demand is weak.

Many Chinese economists have been calling for faster money supply growth to offset deflationary pressures.

However, until 2001, the central bank had been cautious in expanding the money supply - fearing run-away growth would result in reckless lending activities on the part of commercial banks.

The result has been an inadequate money supply growth rate in the eyes of key policy makers, who felt the central bank's combined responsibilities of handling monetary policy and regulating the banking industry had come into conflict.

At the start of this year, the central government decided to restructure the central bank's responsibilities, shifting the regulatory responsibilities to a separate banking commission, which is expected to open this month.

The central bank will focus solely on handling monetary policy in order to maintain rapid economic growth, a stable price index and a stable currency exchange rate.

With the price index marginally fluctuating around zero and bumper foreign exchange reserves, GDP growth should then be the central bank's primary concern.

The main policy focus has become increasing the money supply through the development of credit.

The central bank yesterday said major loans growth has taken place in the sectors of agriculture, infrastructure and consumer credit over the first quarter.

(China Daily April 15, 2003)