China Monetary Policy Report Q3 2002
Central bank: pboc | Type: statement | Date: 2002-12-25

Economic growth has been sustained since the beginning of this year, with the real growth rate at 7.9 percent in the first three quarters. Decline of price level has moderated, with consumer price index down by 0.8 percent compared with the corresponding period of 2001. Consumer demand has remained stable, investment increased rapidly, trade and foreign capital utilization both outperformed projection. First, second and tertiary industries have developed in a synchronized manner, agricultural and industrial output has remained normal.
In the first three quarters, the PBC continued implementation of sound monetary policy, and commercial banks improved loan-marketing incentives, rendering greater support for the economic expansion. First of all, the growth of money supply accelerated, with the balance of M2 reaching RMB17.7 trillion yuan and M1 RMB6.7 trillion yuan at the end of September, up 16.5% and 15.9% respectively from the beginning of the year, and net cash injection in the first nine months amounting to RMB54.5 billion yuan, 13.3 billion yuan more than that of the corresponding period last year. Secondly, financial institutions increased lending by a fairly large margin and continued to improve credit structure. In the first nine months, Chinese funded financial institutions saw their lending grow by RMB1.4035 trillion yuan, 496.8 billion yuan more than that of the first three quarters of 2001. Local currency loan increased by RMB1.355 trillion yuan, 496.8 billion yuan more than the corresponding period of 2001. Loans for industry, agriculture, basic construction and technology upgrading, consumer and discount grew by RMB1.0011 trillion yuan, 367.2 billion yuan more than the corresponding period of 2001, accounting for 73.9 percent of the loan increase. Loan quality improved markedly. In the first three quarters, NPLs balance based on four-category loan classification in all financial institutions declined by RMB49 billion yuan with the NPL ratio down by 3.3 percentage points. Thirdly, household deposits expanded by a large margin and corporate deposits moved upward steadily. In the first three quarters, outstanding balance of household savings deposit increased by RMB1.0462 trillion yuan to RMB8.4 trillion yuan; corporate deposit by RMB636 billion yuan to RMB5.7 trillion yuan. At end September, the excess reserve ratio in financial institutions averaged 4.93%, indicating a sufficient payment capacity. Fourthly, the inter-bank market has been very active with interest rates remaining low. Inter-bank borrowing and bond transactions in the first three quarters totaled RMB8.7187 trillion yuan, 5.4080 trillion yuan more than that of the corresponding period of 2001. Weighted average interest rate of inter-bank lending was 2.122 percent in September, 0.246 percentage points lower than that of the beginning of 2002; weighted average bond repo rate was up by 0.054 percentage points to 2.195 percent. Fifthly, official foreign exchange reserves grew in the first three quarters by US$46.5 billion to US$258.6 billion, and RMB exchange rate remained stable being at 8.2771 yuan against the US dollar.
In order to improve fund structure and credit access for small and medium-sized enterprises (SMEs), the PBC organized two meetings of presidents of the state-owned commercial banks in June and July to explore ways to strengthen loan marketing incentives and financial support for SMEs. The PBC circulated Opinions on Further Strengthening Financial Services for SMEs with Marketable Products, Good Credit Record and Good Efficiency. The commercial banks held branch presidents meeting to implement various measures aiming at increasing lending to the non-state sector. In the first year after China's WTO accession, the auto industry has been expanding far beyond expectation, buttressed by such factors as prices, demand, policy and especially consumer credit boom. At end September, auto loan outstanding reached RMB93.6 billion yuan. Property price hike and growing vacancy against the background of quick expansion of real estate industry imply present potential risks that warrant attention. Commercial banks need to guard against real estate bubbles, and concretely intensify credit management while supporting the growth of the real estate sector.
We expect a modest growth of the world economy in the last quarter of 2002 and growth rate for the whole year fall short of projection made at the beginning of this year. Market will remain turbulent and the industrial countries are likely to keep the accommodating stance of monetary policy. China will continue the proactive fiscal policy and sound monetary policy and move faster in economic restructuring to raise the quality and efficiency of economic growth. The real GDP in 2002 is expected grow by 7.8 percent, consumer price by minus 0.5 percents, lending by all financial institutions by RMB1.6 to 1.7 trillion yuan, M2 by 16 to 17 percent, higher than the projections made at the beginning of this year.
In the last quarter, we will closely follow economic and financial developments at home and abroad and continue the sound monetary policy. First of all, various monetary policy instruments will be used to adjust money supply timely and appropriately. Secondly, deposit and lending rates of renminbi will be kept stable. Thirdly, credit management will be intensified to prevent duplicated constructions and excessive growth of real estate investment and lending in certain areas will be closely monitored. Fourthly, financial services will be improved and loan structure optimized, credit policy guidance will be provided on lending to SMEs, especially the small enterprises. Fifthly, the incentive and restraint mechanism of loan marketing will be further improved. Sixthly, exchange rate stability will be preserved and exchange rate regime improved.
Part One Monetary Performance
In the first three quarters of 2002, the People's Bank of China (PBC) continued the sound monetary policy to strengthen financial support to economic growth through encouraging commercial banks to intensify loan marketing, resulting in the acceleration of credit growth, improvement of credit structure and quality of new loans as well as adequate liquidity of financial institutions and strong position of the balance of payments. In general, the financial system operated in a stable and healthy manner.
I. The growth of money supply accelerated and financial support to economic growth was strengthened.
At the end of September, broad money M2 reached RMB17.7 trillion yuan, up 16.5 percent over a year earlier. The growth rate was 2.1 percentage points higher than in 2001 and 2.9 percentage points higher than in the first three quarters of 2001. Narrow money M1 was RMB6.7 trillion yuan, up 15.9 percent, representing an acceleration of 3.3 percentage points over the end of last year and 3.6 percentage points over a year earlier respectively. Cash in circulation M0 was RMB1.6 trillion yuan, up 7.8 percent. The net cash injection in the first nine months reached RMB54.5 billion yuan, representing an acceleration of RMB13.3 billion yuan over the same period of the previous year. In general, the monthly growth of money supply in all levels accelerated in the first nine months of this year (See figure 1).
The monetary liquidity ratio M1/M2 (see figure 2) has decreased to some extent in recent years, which could be attributed to the following factors: (1) sustained high growth of household savings resulting from steady increase of household income and limited investment opportunities. Especially since the second half of 2001, with the continued fall of the stock market, large amount of savings flowed back to commercial banks, resulting in the rapid growth of quasi-money, hence pushing the growth of M2 higher. Quasi-money at the end of September reached RMB11 trillion yuan, up 16.8 percent year-on-year. The growth rate was 1.3 percentage points higher than in 2001 and 2.5 percentage points higher than in the first nine months of 2001. (2) persistent decrease of the proportion of M0 in money supply as a result of the marked decline of demand for M0 associated with the broad use of modern payment system and bankcards. The proportion of M0 in M2 decreased from 10.7 percent at the end of 1998 to 9.2 percent at the end of September of 2002. Meanwhile, the exclusion of bankcard deposits, which totaled RMB570 billion yuan and accounted for 9 percent of M1 at the end of June this year, from M1 also lowered the ratio of M1/M2. (3) adjustment of statistical coverage of M2 since July 2001. The adjustment included margin deposits of securities firms into M2 while the statistical coverage of M1 remained unchanged.
Box 1 Money Supply and the Monetary Liquidity Ratio (M1/M2)
Money supply refers to the stock of money as medium of circulation and payment at a point of time. In accordance with degree of liquidity, money supply is classified into three categories in China. (1) Cash in circulation M0; (2) Narrow money M1, that is M0 plus institutional demand deposits; (3) Broad money M2, that is the sum of M1, institutional time deposits, margin deposits for stock trading at securities firms as well as other time deposits. Among the three tiers of money supply, M0 is the most liquid. M1 reflects the actual purchasing power of the economy and is second to M0 in terms of liquidity. M2 is the best indicator reflecting the change in aggregate demand since it shows not only the actual purchasing power, but also the potential purchasing power of the economy.
As a reference for analysis of the money supply and demand and monitoring of financial developments, the monetary liquidity ratio (M1/M2) can reflect the structural change of monetary liquidity to some extent. Affected by a number of factors, the changes in household asset structure and development of the market economy, the liquidity ratio fluctuates from time to time. In general, during the 23 years of reform and opening up, the ratio has been on decline (from 82 percent in end-1978 to 37.7 percent at the end of September 2002) despite some monthly rise and seasonal changes.
Starting from the third quarter of 1994, the PBC has been publishing its money supply indicators on a monthly basis and treated them as important reference in the conduct of monetary policy. Before 1998, the PBC conducted its monetary policy mainly through controls over cash in circulation and credit ceilings imposed on state-owned commercial banks. On January 1, 1998, the PBC abolished such credit ceilings and formally established the money supply as the intermediate target for monetary policy. During 1998-2001, the average annual growth rate of broad money M2 was 14.7 percent, which was seven percentage points higher than the sum of GDP and CPI growth rates during the same period of time.
II. Loans by financial institutions increased markedly, credit structure further improved and the non-performing loan (NPL) ratio continued to decline
In the first nine months of this year, the outstanding loans by the Chinese financial institutions increased by RMB1.4035 trillion yuan to RMB13.3 trillion yuan, representing an acceleration of RMB496.8 billion yuan. Loans in renminbi increased by RMB1.355 trillion yuan, accelerating by RMB427.7 billion yuan. The consecutive decline of loans in foreign currency since 1998 has been reversed to an increase of US$5.85 billion from the beginning of this year, representing an acceleration of US$8.33 billion (if compared with a decrease of US$2.48 billion during the same period of last year).
Table 1 Quarterly Change of Renminbi Loans by Financial Institutions
From January to September, 2002 100 Million Yuan
Year-on-year Growth
Year-on-year Growth
Year-on-year Growth
Date of last update
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