EXECUTIVE SUMMARY

 

In the first half of 2004, with the recovery of the global economy, the pressure of inflation built up in major economies. Some central banks turned to take fighting inflation as the main monetary policy objective. An array of macro control measures have been gradually put in place in China, which started to bear fruits. The unstable and unhealthy factors in the economy have been contained, enabling the economy to carry on the momentum of rapid, efficient and vigorous growth. In the first half of 2004, China's GDP increased by 9.7percent over the same period of 2003.

 

Broad money M2 grew by 16.2 percent to RMB23.8 trillion yuan at end-June, representing a deceleration of 4.6 percentage points from a year earlier. RMB loans by financial institutions increased by RMB1.43 trillion yuan, 353.6 billion yuan less than the first half of 2003 but 600 billion yuan more over the first half of 2002. RMB deposits grew by RMB2.17 trillion yuan, RMB178.4 billion yuan less than the same period of 2003. Balance of base money reached RMB5.13 trillion yuan, representing an increase of 19.2 percent year-on-year, 2.4 percentage points higher than that of 2003. Official foreign exchange reserves increased by USD67.4 billion to USD470.6 billion. RMB exchange rate remained stable, being at RMB8.2766 yuan per US dollar.

 

In 2004, the PBC maintained the sound monetary policy and primarily used economic measures to strengthen aggregate controls. Consistent with the national industrial policies, moral suasion was intensified to guide credit orientation, improve credit structure and ensure the healthy development of the national economy. First, flexible open market operations were conducted to adjust the market liquidity; Second, reserve requirement ratio was raised once again; Third, floating rates were applied to central bank lending and the system of differentiated reserve requirement ratio was adopted; Fourth, market-based interest rate reform progressed steadily; Fifth, moral suasion was intensified to guide credit structure optimization; Six; financial market developed steadily; Seventh, support was given to financial restructuring of the financial institutions to promote financial reform; Eighth, efforts were made to maintain balanced BOPs and keep RMB exchange rate stable at an adaptive and equilibrium level.

 

The PBC will continue to carry out the central government's guideline and work plans by cultivating and sticking to the scientific approach to economic development. It will continue to conduct the sound monetary policy and improve policy measures according to the economic and financial development. Intensity and rhythm of the policy measures will be controlled to rein in growth of money and credit and improve credit structure. The PBC will also direct commercial banks to make sensible assessment of market risks and continue to provide normal working capital support for enterprises with marketable products, good efficiencies and concrete contributions to enlargement of employment, and for construction of projects conforming to the state industrial policies and market access requirements. Indirect instruments will be mainly used in the process of macro control so as to make the whole process more scientific, forward-looking and efficient. The PBC will further promote economic restructuring, institutional reform and the transformation of growth pattern so as to enhance the economy to develop in a sustainable, rapid, coordinated and healthy way. First, flexibly apply quantitative instruments to appropriately adjust liquidity in the financial system; Second, steadily promote market-based interest rate reform to ensure a more significant role of the market in resource allocation; Third, strengthen window guidance to commercial banks to improve credit and industrial structures; Fourth, speed up development of financial markets to improve efficiencies of monetary policy transmission; Fifth, promote reform of financial institutions to enhance sustainable development of the financial sector; Six, keep the renminbi exchange rate stable at an adaptive and equilibrium level.

 

 

 

 

 

 

 

 

Part One   Monetary and Credit Performance

 

Since the beginning of this year, China's economy has maintained its good growth momentum. Financial macro controls have produced good results, with money and credit growth decelerating quarter by quarter, the RMB exchange rate remaining stable and the financial sector performing sound and steady.

 

I.        Growth of money supply continued to fall

 

Broad money M2 grew by 16.2 percent to RMB23.8 trillion yuan at end-June, representing a deceleration of 4.6 percentage points from a year earlier or 3.4 percentage points from that of 2003 respectively. The growth rate of broad money has declined 4 months in a row. Narrow money M1 grew by 16.2 percent to RMB8.9 trillion yuan, 4 percentage points lower year-on-year or 2.5 percentage points lower compared with 2003. The rapid decline of money growth rate in June was partly attributable to the high reference base in June 2003. Cash in circulation M0 grew 12.2 percent to RMB1.9 trillion yuan at end-June. During the first half of 2004, cumulative cash withdrawal reached RMB72.8 billion yuan, 40.7billion yuan more than the first half of 2003.

 

II. Growth of loans by financial institutions slowed down markedly

 

During the first half of 2004, loans in both RMB and foreign currencies by financial institutions (including foreign financial institutions) increased by RMB1.56 trillion yuan, 345.1 billion yuan less than the growth recorded for the same period of 2003. In particular, RMB loans increased by RMB1.43 trillion yuan, 353.6 billion yuan less than the first half of 2003 but 600 billion yuan more over the first half of 2002, while foreign currency loans increased by USD15.6 billion, accelerating by USD1 billion more over the same period of 2003.

 

At end-June, outstanding balance of loans in both RMB and foreign currencies by financial institutions reached RMB18.1 trillion yuan, representing an increase of 16.7 percent. In particular, RMB loans grew by 16.3 percent to RMB16.99 trillion yuan. Marked deceleration of loan growth was partly a result of the macro economic controls and the fallout of the largest single month loan increase ever recorded in June 2003.

 

In the first half of 2004, new loans in RMB were mainly medium & long-term loans and agricultural loans. Agricultural loans increased by RMB171.3 billion yuan, an acceleration of RMB28.2 billion yuan over the same period of 2003. Medium & long-term loans increased by RMB731 billion yuan, a rise of RMB71.7 billion yuan. In particular, capital construction loans grew by RMB338.3 billion yuan, an acceleration of RMB47.8 billion yuan. Short-term loans and discounted commercial paper loans increased less than that of the first half of 2003. Short-term loans increased by RMB544.8 billion yuan, RMB167.7 billion yuan less compared with the growth recorded for the first half of 2003, while discounted commercial papers increased by RMB122.3 billion yuan, a drop of RMB219.5 billion yuan. In June, capital construction loans expanded by RMB80.5 billion yuan, representing a year-on-year decrease of RMB18.6 billion yuan for the first time since the rapid growth of fixed asset investment was effectively restrained as a result of the macro-economic controls.

 

In the first half of 2004, loans issued by wholly state-owned commercial banks grew by RMB668.6 billion yuan, RMB337.4 billion yuan less than the growth recorded for the same period of 2003; While loans issued by joint-stock commercial banks increased by RMB290 billion yuan, down by RMB88.8 billion yuan, and loans issued by rural credit cooperatives surged by RMB256.6 billion yuan, accelerating by RMB35 billion yuan.

 

III. Growth of deposits decreased

 

Deposits in both RMB and foreign currencies of financial institutions increased by RMB2.18 trillion yuan in the first half of 2004, RMB166.1 billion yuan less than the growth of the first half of 2003. In particular, deposits in RMB grew by RMB2.17 trillion yuan, among which, corporate deposits grew by RMB633.5 billion yuan, a decrease of RMB38.4 billion yuan; while savings deposits grew by RMB1.02 trillion yuan, RMB52.2 billion yuan less increased. The growth of savings deposits has been falling for 5 months in a row. Since the beginning of 2004, monthly growth of household savings deposits has declined from 20.5 percent at end-January to 16.5 percent at end-June. In particular, growth of time deposits has shrunk gradually, with the ratio of time deposits growth to total savings deposits increase falling down from 62 percent in the first quarter to 31 percent in the second quarter of 2004.

 

In the first half of 2004, outstanding balance of deposits in both RMB and foreign currencies of financial institutions increased by 17.1 percent to RMB24.22 trillion yuan, among which, household savings deposits increased by 14.5 percent to RMB12.04 trillion yuan and corporate deposits surged by 18.7 percent to RMB8.41 trillion yuan.

 

IV. Base money increased rapidly

 

At end-June, the balance of base money reached RMB5.13 trillion yuan, representing an increase of 19.2 percent year-on-year, 2.4 percentage points higher than that of 2003. Excess reserve ratio of financial institutions was 3.75 percent at end-June, up 0.43 percentage points over May. In particular, excess reserve ratio of wholly state-owned commercial banks, joint-stock commercial banks and rural credit cooperatives averaged at 3.27 percent, 6.5 percent and 4.32 percent respectively.

 

V. Market interest rate remained broadly stable

 

The interest rate for negotiable RMB deposits of commercial banks (above RMB30 million yuan) increased slightly in the second quarter of 2004. In particular, the weighted average interest rate for deposits with a maturity of 61 months remained at 3.78 percent, unchanged compared with the first quarter, and the weighted average interest rate for negotiable post savings deposits with a maturity of 37 months stayed at 3.78 percent, up 0.1 percentage points over the first quarter.

 

Due to the increase of interest rate in international financial markets, the interest rates of domestic foreign currency loans and large-amount deposits rose slightly. Its expectations for interest rate hike by the US Fed strengthened after April, US dollar LIBOR increased gradually, with the rate of one-year maturity reaching a 24-month high of 2.5 percent on June 15^th. In June, the weighted average interest rate for Large-amount US dollar deposits (with an amount above USD3 million) stood at 1.43 percent, 0.17 percentage points higher than that of May, and the weighted average fixed interest rate for US dollar loans was 3.04 percent, up 0.27 percentage points over that of May.

 

Table 1      Average Interest Rates of Large Amount Deposits and     

            Loans in US Dollar From January to June in 2004 (%)

 

Maturity	Large-amount Deposits				Loans
	Less than 3 months	3-6 months	6-12 months	1 year	1 year (fixed rate)	1 year (floating rate)
1 month	0.8663	1.0327	0.9862	1.0271	2.5417	1.8069
2 months	0.9201	1.1892	0.7948	0.9606	2.3818	2.3647
3 months	0.9834	1.3757	1.0253	1.3929	2.4414	2.1672
4 months	0.8849	1.0156	0.9604	1.1958	2.5307	2.3858
5 months
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