wu xiaoling : review of china ’ s economy in 2005 and outlook for 2006 speech by ms wu xiaoling, deputy governor of the people ’ s bank of china, at the expert meeting on analysis and forecast of 2006 financial situation in china, beijing, 18 march 2006. * * * in 2005, under the leadership of the state council, all regions in china followed a scientific development approach, further intensified macro - economic management and continued reform and opening - up. the gdp grew by 9. 9 percent, fixed asset investment increased by 25. 7 percent, and cpi moved up by 1. 8 percent. the disposable income of urban and rural residents grew by 9. 6 percent and 6. 2 percent respectively. the registered urban unemployment was 4. 2 percent. trade grew by 23. 2 percent, while the profits of statistically large enterprises rose by 22. 6 percent. broadly speaking, the national economy displayed a good momentum featuring fairly rapid growth, good return, stable price, and good dynamics. in 2006, the outlook of the chinese economy is good and the forecast goals are expected to materialize, i. e. a gdp growth of 8 percent and a cpi increase of around 3 percent. in 2005, the monetary and financial conditions maintained a good momentum of smooth performance in line with economic growth. m2 grew by 17. 6 percent, rmb deposits by 19 percent, loans by 13 percent. the destination and maturity structure of loans became better. short - term working capital loan and bill financing accounted for a substantially larger share, i. e. 47. 7 percent, in the new loan. the excessive growth of medium and long - term loans were checked, its share in the new loan declining by 10. 8 percentage points. the rural area, agricultural sector and farmers received stronger financial support. the exchange rate regime reform was implemented smoothly. exchange rate moved in both directions and its flexibility increased gradually. between july 21 and end of 2005, the highest rmb to dollar exchange rate when market was closed was 8. 0702 yuan, while the lowest reached 8. 1128 yuan. at end 2005, the exchange rate was closed at 1 dollar to 8. 0702 yuan. on march 10, 2006, the rmb exchange rate was 8. 0492 yuan to one dollar. in december, the 7 - day repo rate at the money market was 1. 56 percent. preliminary results were achieved in capital market reform ; the stock market saw a

balance of payments existed at that time was also corrected in this process. the high inflation rate recorded in 1988 was a result of several factors, including a so - called theory of “ harmless inflation ” that had been influential in 1987 - 1988. after 1988, this view fell completely out of favor. the next round of inflation, starting in 1993, caused the third plenary session of the 14th cpc central committee to lay out a formal macroeconomic policy framework as well as various guiding perceptions and principles, including what kind of macroeconomic policy framework should be established? what is the role of the fiscal policy? what is the role of the monetary policy? what exactly is government plan attempting to coordinate? based on these deliberations, the macroeconomic policy - making has improved significantly, and we have also learned how to apply economic leverages appropriately and timely, and how to deal with the inflation. through the 1990s, the chinese banking sector faced a predicament characterized by the underdevelopment of a sound “ credit culture. ” during this period, shortcomings of the credit culture were exemplified by two main types of bank lending. the first was policy lending, including those determined by the government plan or under variety of administrative interventions. the second was so - called “ relationship - based lending ”. at that time, there existed large deficiencies in the standards of accounting, information disclosure and financial statements reporting. enterprises ’ access to credit was largely based on their management ’ s personal relationship to the banks, and only those with good relationship got the loans. rectifying china ’ s unsound credit culture has been a long and painful process. a key step on this path was the nation ’ s first national financial work conference held in november 1997, which set out a vertical management system for the commercial banks. both the central and local governments were thus prohibited from interfering with loan decisions. this change was considered an important step forward in transforming the credit culture. at the end of 1997, the asian financial crisis spread to its full scale. although china averted a head - on hit by the crisis, its aftermath had produced long - term effects on the chinese economy, including, most obviously, the problem of non - performing loans ( npls ). according to accounting standards used domestically at that time, in 1998 the chinese banking system had an npl ratio of 25 percent, although international accounting standards would have put the rate as high as more than 40 percent – a figure underscoring a np