China Monetary Policy Report Quarter Four, 2004
Central bank: pboc | Type: decision | Date: 2005-06-25

(Monetary Policy Analysis Group of the People's Bank of China)
Executive Summary
In 2004, world economy recovered in an all-round way. The Chinese economy continued to post steady and rapid growth supported by strengthened macroeconomic adjustment. In particular, grain production took a favorable turn with grain price falling steadily from high levels; faster than desired fixed-asset investment was reined in; vitality of the consumer market increased; foreign trade developed rapidly; and household income, enterprise profits, fiscal revenue and foreign exchange reserves gained substantial increase. In 2004, China's GDP increased by 9.5 percent to 13.7 trillion yuan. The CPI rose by 3.9 percent.
The PBC continued with the sound monetary policy and highlighted its forward-looking, scientific, and effective approach to macro financial management under the leadership of the central government. A mix of monetary policy instruments was applied to appropriately adjust the credit aggregates on a timely basis and prompted commercial banks to implement the macro financial management policy by differentiating credit support to various industries. Efforts were also intensified to develop a market-based macro control mechanism and speed up the reform of financial institutions. First, open market operations were conducted with improved flexibility. Second, required reserve ratio was raised and a differentiated reserve requirement system was adopted to strengthen the discipline of various financial institutions. Third, the role of interest rate leverage was given a full play in macroeconomic management. Fourth, market-based interest rate reform was steadily advanced. Fifth, window guidance and credit policy advice to commercial banks were strengthened. Sixth, foreign exchange administration reform was deepened to promote the balance of international payments. Seventh, the reform of financial institutions was steadily advanced.
In 2004, the financial sector remained sound and stable, with money supply growth falling back and loan growth recording an appropriate level. In general, the projected targets of financial macro control have been met. Broad money M2 grew by 14.6 percent year-on-year to 25.3 trillion yuan at end-2004. New RMB loans issued by all financial institutions registered 2.26 trillion yuan, 482.4 billion yuan less than that of 2003 but 417.3 billion yuan more than that of 2002. The balance of base money reached 5.9 trillion yuan, representing a year-on-year increase of 12.6 percent. Deposit and loan interest rates of financial institutions edged up, and money market interest rates remained stable. Balance of payments recorded dual surplus both under current account and capital account. At end-2004, the official foreign exchange reserves reached US$609.9 billion, up US$206.7 billion over 2003. The RMB exchange rate remained stable, standing at 8.2765 yuan per US dollar.
The national economy is advancing towards the desired targets of macro control as some unhealthy factors in the economic operation were contained, growth of investment slowed down and that of money and credit decelerated. However, some deep-rooted problems are yet to be addressed and further progress is needed to improve macroeconomic management. Agriculture has yet to strengthen its fundamental role in the economy, pressure still looms large for a rebound of fixed-asset investment and that on inflation has not eased fundamentally. The effectiveness of monetary policy is to be enhanced and stability of the financial sector needs to be strengthened.
In 2005, the PBC will maintain the consistency and soundness of the monetary policy. Narrow money M1 and broad money M2 are projected to grow by 15 percent respectively, and RMB loans extended by all financial institutions to increase by 2.5 trillion yuan. The PBC will continue to pursue the sound monetary policy. Measures will be taken to support steady economic development as well as to prevent inflation and systemic financial risks. First, the indirect management mechanism will be improved to maintain steady growth of money and credit. Second, the interest rate leverage will be flexibly used to promote balanced development of economic aggregates and structural adjustment. Third, the role of credit policies will be highlighted to promote economic restructuring by differentiating credit support to various sectors. Fourth, the term structure of credit will be improved and risk prevention capability of the financial institutions needs to be enhanced. Fifth, the development of financial markets will be promoted. Sixth, the reform of financial institutions will be advanced. Seventh, the RMB exchange rate formation system will be improved to maintain the exchange rate basically stable at an adaptive and equilibrium level.
Part One Monetary and Credit Performance
In 2004, the national economy registered stable and rapid growth.
Financial macro controls have yielded prominent effects. Major financial indicators stayed within reasonable ranges, with money supply growth falling back and loan growth recording an appropriate level. In general, the projected targets of financial macro controls have been met.
I. Money supply growth fell back into a reasonable range
With the implementation of macro economic control measures, money supply growth showed the trend of inching down. Growth of broad money M2 hit the fastest level of 19.4 percent for the year in February, and then fell back gradually. M2 growth fell into the range between 13-15 percent for five consecutive months from August to December, which is relatively reasonable and consistent with economic growth.
M2 grew by 14.6 percent year-on-year to 25.3 trillion yuan at end-2004, representing a deceleration of 5 percentage points from the growth of 2003. Narrow money M1 grew by 13.6 percent year-on-year to 9.6 trillion yuan, decelerating by 5.1 percentage points over the growth of 2003. Cash in circulation M0 grew by 8.7 percent year-on-year to 2.1 trillion yuan. Cumulative net cash injection during 2004 reached 172.2 billion yuan, 74.6 billion yuan less than in 2003.
II. Deposit growth of financial institutions remained stable, while that of RMB savings deposits slowed
Total deposits in both RMB and foreign currencies of financial institutions (including foreign-funded ones) increased by 15.3 percent year-on-year to 25.3 trillion yuan, representing a growth of 3.37 trillion yuan from the beginning of the year or a deceleration of 337.6 billion yuan from 2003. In particular, RMB deposits grew by 3.33 trillion yuan to 24.1 trillion yuan, decelerating by 387.1 billion yuan from 2003; foreign currency deposits grew by US$4.45 billion to US$153 billion, representing an acceleration of US$5.98 billion from 2003.
RMB corporate deposits increased by 16.8 percent year-on-year to 8.5 trillion yuan at end-2004, a growth of 1.16 trillion yuan over the beginning of the year and a deceleration of 90.1 billion yuan from 2003 (but an acceleration of 211.2 billion yuan compared with 2002). RMB savings deposits grew by 15.4 percent year-on-year to 12 trillion yuan, representing a growth of 1 .59 trillion yuan from the beginning of the year and a deceleration of 70.2 billion yuan over 2003. Household willingness to save declined due to relatively low interest rates and high prices. Savings deposits growth decreased from February to September in a row. Since the PBC raised benchmark interest rate on October 29, 2004, household willingness to save recovered. Savings deposits growth accelerated by 76.3 and 55.5 billion yuan in November and December respectively, mainly as a result of increases of time deposits.
III. Loans by financial institutions expanded at an appropriate level, and medium and long-term loans recorded stronger growth
At end-2004, loans in both RMB and foreign currencies by financial institutions amounted to 18.9 trillion yuan, increasing by 14.4 percent year-on-year or 2.41 trillion yuan, and decelerating by 7.1 percentage points or 578.5 billion yuan over 2003. In particular, RMB loans rose by 14.5 percent year-on-year to 17.7 trillion yuan, falling by 6.6 percentage points over 2003. The growth of 2.26 trillion yuan over the beginning of the year was sound, 482.4 billion yuan less than that of 2003 but 417.3 billion yuan more than that of 2002. Foreign currency loans reached US$135.4 billion, increasing by 12.5 percent or US$17.14 billion, US$11.62 billion less than 2003.
In terms of the structure, medium and long-term loans recorded stronger growth. RMB medium and long-term loans increased by 1.37 trillion yuan, decelerating by 50 billion yuan over 2003. Out of medium and long-term loans, infrastructure loans expanded by 626.8 billion yuan, 10.6 billion yuan less than 2003. Short-term loans added 649.7 billion yuan, decelerating by 300 billion yuan over 2003. Bill financing grew by 202.6 billion yuan, down 119.7 billion yuan over the previous year. Consumer loans increased by 432.7 billion yuan, 76.4 billion yuan less than the growth recorded in 2003.
Breaking down by institutions, RMB loans issued by policy banks increased by 271.2 billion yuan in 2004, 82.8 billion yuan more than 2003. Loans issued by wholly state-owned commercial banks increased by 1022.2 billion yuan, 291.3 billion yuan less than 2003. Loans issued by joint-stock commercial banks grew by 469 billion yuan, decelerating by 191.2 billion yuan, loans issued by urban credit cooperatives increased by 139.4 billion yuan, decelerating by 41.6 billion yuan, and loans issued by rural credit cooperatives expanded by 253.2 billion yuan, decelerating by 68.7 billion yuan.
IV. Growth of base money declined, and liquidity of financial institutions remained sound
At end-2004, the balance of base money reached 5.9 trillion yuan, representing an increase of 660.6 billion yuan or 12.6 percent from the beginning of the year and a deceleration of 4.2 percentage points over 2003. The excess reserve ratio of financial institutions dropped to 3.45 percent at end-April from 4.68 percent at end-January, and stood between 3-4 percent for the following eight consecutive months. The excess reserve ratio rose to 5.25 percent at end-December resulted from increasing needs for liquidity during the holiday season. In particular, the excess reserve ratio of wholly state owned commercial banks stood at 3.54 percent, that of joint-stock commercial banks reached 7.47 percent, and that of rural credit cooperatives hit 10.34 percent. In general, financial institutions maintained sound liquidity to meet the demands of reasonable loan growth.
V. Deposit and loan interest rates of financial institutions edged up, and money market interest rates remained stable
Loans interest rates of financial institutions edged up gradually. In the fourth quarter, the weighted average fixed interest rate for one-year RMB loans of commercial banks was 6.75 percent, 1.21 times the benchmark interest rate, up 0.47 percentage points over the third quarter and 1.05 percentage points over the beginning of the year. The interest rate for negotiable RMB deposits of commercial banks (above 30 million yuan) increased slightly. In particular, the weighted average interest rate for negotiable deposits with a maturity of 61 months stood at 4.47 percent, up 0.32 percentage points compared with the beginning of the year, and the weighted average interest rate for negotiable deposits with a maturity of 37 months hit 4.32 percent, up 0.17 percentage points over the beginning of the year.
Due to successive interest rate hikes of the US Fed and interest rate rise in international financial markets, the interest rates of domestic foreign currency loans and large-value deposits edged up among fluctuations.
In December, the weighted average interest rate for one-year large-value US dollar deposits (above US$3 million) stood at 2.27 percent, 1.28 percentage points higher than the beginning of the year; the weighted average fixed interest rate for one-year US dollar loans was 3.43 percent and the weighted average floating interest rate for US dollar loans was 3.38 percent, up 0.87 and 1.19 percentage points respectively over the beginning of 2004.
Table 1: Average Interest Rates of Large Amount Deposits and Loans in US Dollar during January-September of 2004 (
Maturity
Large-Value Deposits
Less than 3 months
1.77 1.28
3-6 months
2.37 1.80
6-12 months
Date of last update
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