China Monetary Policy Report, Quarter Three, 2004
Central bank: pboc | Type: decision | Date: 2004-12-25

Executive Summary
The world economy has maintained its strong growth momentum since the start of 2004. The Chinese economy has also gained steady and rapid growth with improved efficiency. Macroeconomic adjustment has achieved anticipated results. The faster than desired expansion of fixed asset investment was initially reined in and the growth of money and credit continued to moderate towards the expected targets. In the first three quarters, GDP increased by 9.5 percent to RMB9.3 trillion yuan, accelerating by 0.6 percentage points over the same period of 2003.
In accordance with the central government's guidance, the People's Bank of China (PBC) continued the pursuit of sound monetary policy, strengthened financial management, exercised proper control over the growth of money and credit, encouraged credit structure improvement, fostered institutional capacity building for financial macro adjustment and promoted restructuring of the financial institutions. First, flexible open market operations were conducted. Second, reserve requirement ratio was raised further. Third, benchmark interest rates of deposits and loans of financial institutions were raised. Fourth, market-based interest rate reform was further promoted. Fifth, discretion was gained by the central bank in setting its lending rate and a differentiated required reserve ratio system was introduced. Sixth, "Window Guidance" for commercial banks was intensified to encourage credit structure improvement. Seventh, financial market developed steadily. Eighth, the reform of financial institutions was promoted. Ninth, efforts were made to improve the balance of payments and keep RMB exchange rate stable at an adaptive and equilibrium level.
On the whole, the performance of the financial sector remains sound and healthy. At end-September broad money M2 reached RMB24.4 trillion yuan, representing an increase of 13.9 percent year-on-year, up 0.3 percentage points from end-August but decelerating by 6.7 percentage points from a year earlier. In the first three quarters, RMB loans by all financial institutions increased by RMB1.8 trillion yuan, RMB669.7 billion yuan less than recorded for the same period of 2003 but RMB439.9 billion yuan more than growth in the first three quarters of 2002. Credit structure further improved, with fixed asset loans such as infrastructure loans further contained and working capital loans growing steadily. Money Market interest rates remained stable. At end-September, official foreign exchange reserves increased to USD514.5 billion. The RMB exchange rate remained stable, standing at RMB8.2766 yuan per US dollar.
Macroeconomic management has currently reached a critical stage. The PBC will closely watch the development of various price indices and stand vigilant against a rebound of investment so as to preserve and further build on the achievements in recent macroeconomic and financial management. In the next stage, the PBC will continue to pursue the sound monetary policy and exercise proper control over the monetary and credit aggregates. Efforts will be focused on improving credit structure and ensuring an important role of the financial sector in macroeconomic management. First, a mix of monetary policy instruments will be flexibly applied to keep growth of money and credit at a reasonable level. Second, "window guidance" will be timely used to encourage credit structure improvement. Third, market-based interest rate reform will be steadily promoted and term structure of interest rate will be improved. Fourth, reform of financial institutions will be accelerated to strengthen their competitiveness. Fifth, financial market will be further developed to optimize resource allocation. Sixth, the RMB exchange rate will be kept basically stable at an adaptive and equilibrium level.
Part One Monetary and Credit Performance
In the first three quarters of 2004, the Chinese economy has maintained its rapid growth momentum. Financial macro controls have yielded results
with the performance of the financial sector remaining sound. Money and credit grew at an appropriate pace and credit structure further improved. The overall monetary and credit performance was moving toward the projected direction of financial macro controls.
I. Money supply grew at an appropriate pace
The growth of broad money aggregates rebounded by a small margin after decline of six months in a row. At end-September broad money M2 reached RMB24.4 trillion yuan, increasing by 13.9 percent year on year, up 0.3 percentage points from end-August and decelerating by 6.7 percentage points over the same period of the previous year. Narrow money M1 grew by 13.7 percent year-on-year to RMB9.0 trillion yuan, down 4.8 percentage points compared with the same period of 2003. Cash in circulation M0 grew 12.1 percent year-on-year to RMB2.1 trillion yuan.
II. Growth of savings deposits decreased over the same period of a year earlier
At end-September deposits in both RMB and foreign currencies of financial institutions (including foreign financial institutions) increased by 15.3 percent year-on-year to RMB24.8 trillion yuan, a growth of RMB2.8 trillion yuan from the beginning of the year, RMB421.9 billion yuan less than that of the same period of 2003. In particular, deposits in RMB grew by RMB2.7 trillion yuan to RMB23.5 trillion yuan over the beginning of the year, decelerating by RMB498.9 billion yuan over the same period of 2003. Deposits in foreign currencies rose by USD6.76 billion to USD155.9 billion over the beginning of the year, accelerating by USD9.32 billion over the same period of a year earlier.
At end–September, corporate deposits in RMB reached RMB8.1 trillion yuan, representing a growth of RMB752.3 billion yuan compare with the beginning of the year, RMB262.4 billion yuan less than the growth of the same period of 2003 but RMB111.9 billion yuan more than that of the same period of 2002. The year-on-year growth of corporate deposits hit 14.9 percent, higher than that of broad money. Savings deposits in RMB amounted to RMB11.6 trillion yuan, increasing by RMB1.18 trillion yuan over the beginning of the year, RMB207 billion yuan less than the growth of the same period of the previous year.
In the context of low interest rate and high prices, household savings propensity declined. The growth of savings deposits have been dropping for eight consecutive months, slowing month by month, from 20.5 percent at end-January down to 14.4 percent at end-September. In terms of maturity structure of savings deposits, the proportion of time deposits declined coupled with obvious trend of increasing short-term deposits. In the first three quarters the ratio of time deposits growth to total savings deposits growth fell by 8 percentage points over the same period in 2003.
III. Growth of loans by financial institutions rebounded steadily, and structure of new loans further improved
At end-September loans in both RMB and foreign currencies by financial institutions amounted to RMB18.5 trillion yuan, increasing by 13.7 percent year-on-year and RMB1.9 trillion yuan over the beginning of the year, RMB736 billion yuan less than the growth of the same period of 2003. In particular, RMB loans rose by 13.6 percent year-on-year to RMB17.4 trillion yuan, a growth of RMB1.8 trillion yuan over the beginning of the year, RMB669.7 billion yuan less than that of the first three quarters of 2003 but RMB439.9 billion yuan more than that of 2002. The growth of RMB loans by financial institutions began to fall in May, while stabilized in August and rebounded steadily in September. In September RMB loans by financial institutions increased by RMB250.2 billion yuan, 45.5 billion yuan less than the growth of last September, but 73 billion yuan more than the average growth in September during 1998-2002 and 134.6 billion yuan more than the growth of August.
As growth of loans slowed down, structure of new loans further improved. In September RMB short-term loans increased by RMB114.8 billion yuan, accelerating by 30.5 billion yuan over September 2003, further boosting supports for working capital demand of enterprises. Bill financing grew by RMB12.3 billion yuan, down 13.9 billion yuan over the same period of the previous year, suggesting that deceleration moderated. Medium & long-term loans have been further reined in, increasing by RMB125.9 billion yuan in September, down RMB49.9 billion compared with the growth of last September. Out of medium & long-term loans, infrastructure loans increased by RMB41 billion yuan, decelerating by RMB55.4 billion yuan. Consumer loans increased by RMB41.9 billion yuan, only 6.1 billion yuan less than the grow of last September and 11.1 billion yuan more than the growth of this August, keeping its strong growth momentum.
Breaking down by institutions, in the first three quarters RMB loans issued by wholly state-owned commercial banks increased by RMB829.5 billion yuan, RMB436.3 billion yuan less than the growth recorded for the same period of 2003, While loans issued by joint-stock commercial banks grew by RMB368.4 billion yuan, decelerating by RMB199.1 billion yuan, and loans issued by rural credit cooperatives rose by RMB294.6 billion yuan, decelerating by RMB20.2 billion yuan. Out of the overall new RMB loans, wholly state-owned commercial banks accounted for 46 percent, down 5 percentage points, joint-stock commercial banks took up 21 percent, down 2 percentage points and rural credit cooperatives took up 16 percent, up 4 percentage points.
Box 1: Survey and Analysis on the Current Status of Access to Working Capital Loans
Responding to the concern of working capital stretch voiced by some regions and enterprises, the People's bank of China organized nine regional branches and two operations offices to conduct a survey on working capital loans, small and medium-sized enterprises loans and loans to non-state-owned enterprises granted during April-August 2004. In each region one provincial branch of wholly state-owned commercial banks, one branch of joint-stock commercial banks and one urban commercial bank were chosen as survey samples, involving 48864 working capital loans worth of RMB400.7 billion yuan, 30870 working capital loans worth of RM174.3 billion yuan and 28819 loans to non-state-owned enterprises worth of RMB210 billion yuan.
The results of the survey showed that the approval rates of all the above mention three categories of loans exceeded 80 percent. In particular, the approval rate of working capital loans averaged at 87 percent of the total number of applications and 83 percent of amount applied for; the approval rate of SME loans averaged at 86 percent of the total number of applications and 80 percent of amount applied for; and the approval rate of loans to non-state-owned enterprises stood at 85 percent of the total number of applications and 81 percent of amount applied for on the average. It needs to be pointed out that the calculation of the approval rates were based on the loan applications submitted, excluding those enterprise that experienced shortage of fund but did not submit loan application. As banks make loan decisions in compliance with risk control system, credit management framework and lending approval procedures, only qualified enterprises can be granted loans.
The reasons that some loan demand failed to be met were as follows: first, commercial banks strengthened restructuring and lifted credit criteria, which, from a long-term view will be conducive to the improvement of bank loans quality and the stability of the financial system. Second, some loan applicants suffered from high debt-asset ratio, weak profit capacity and lack of standardized financial reports. Third, SMEs financing features high risk and cost. In other countries around 60-70 percent of SMEs mainly rely on equity market financing, while in China SMEs have long relied on bank loans. As commercial banks strengthen risk management, SMEs with inadequate information disclosure and weak guarantee mechanism will encounter difficulty in access to bank loans.
In fact as the growth of loans by financial institutions decreased, enterprises secured more funds from other channels. First, funds raised by enterprises through other channels such as sale of foreign exchange, export tax rebate and corporate bonds increased. Second, commercial papers issued by enterprises grew markedly compared with 2003. Third, informal lending was very dynamic. Some enterprises raised quite a large amount of capital through informal lending, However, irregular informal lending may have adverse effects, thus deserving strengthened supervision and standardization.
It demands concerted efforts of various fronts to satisfy the reasonable needs of enterprises for working capital for the purpose of normal business operations. Upon the approval of the State Council, on October 29 the People's Bank of China raised the benchmark interest rates of deposits and loans of financial institutions, expanded the ceiling of RMB loan rates so that financial institutions can better price their loans in line with risks, promoting financial institutions to increase their support for SMEs and curbing usury. Commercial banks need to observe the market rule and conform to the principles of profitability, security and liquidity on the one hand, and improve their financial services to be more active in extending working capital loans on the other hand. Enterprises need to adapt to the economic and financial developments, and seek for diverse channels of financing. In addition, efforts should be stepped up in promoting the development of various financing instruments such as commercial paper, corporate bond and equity and encouraging financial innovation with a view to broadening financing channels for enterprises.
IV. Growth of base money slowed
At end-September the balance of base money reached RMB5.32 trillion yuan, representing an increase of 14.4 percent year on year, 2.4 percentage points lower than that of 2003. Excess reserve ratio of financial institutions was 3.64 percent, with the ratio of wholly state-owned commercial banks, joint-stock commercial banks and rural credit cooperatives standing at 3.42 percent, 4.85 percent and 4.57 percent respectively.
V. Money Market interest rates remained stable
In the third quarter, the weighted average fixed interest rate for one-year RMB loans of commercial banks was 6.28 percent, 1.18 times the benchmark interest rate, up 0.58 percentage points over the second quarter. The interest rate for negotiable RMB deposits of commercial banks (above RMB30 million yuan) increased slightly. In particular, the weighted average interest rate for negotiable deposits with a maturity of 61 months stood at 4.1 percent, up 0.32 percentage points compared with the previous quarter, and the weighted average interest rate for negotiable deposits with a maturity of 37 months hit 3.95 percent, up 0.17 percentage points over the second quarter.
Due to successive interest rate hikes of the U.S. Fed and interest rate rise in international financial markets, the interest rates of domestic foreign currency loans and large-value deposits have edged up since the beginning of 2004.
In September, the weighted average interest rate for one-year large-value USD deposits (above USD3 million) stood at 2.01 percent, 0.98 percentage points higher than that of January; the weighted average fixed interest rate for one-year USD loans was 3.36 percent and the weighted average floating interest rate for US dollar loans was 2.67 percent, up 0.82 and 0.86 percentage points respectively over January.
Table 1: Average Interest Rates of Large Amount Deposits and Loans in US Dollar during January-September of 2004

Unitï¼percent

Large-Amount Deposits
3-6 months
6-12 months
Date of last update
2004å¹´12æ30æ¥