, from one primarily dominated by agriculture, to one driven by the industrial and service sectors. the rapid emergence of china ’ s industrial economy has been associated with strong investment growth in bis central bankers ’ speeches manufacturing and infrastructure ( graph 2 ). even by emerging market economy standards, china ’ s development has been characterised by very high levels of investment, underpinned by a high and rising rate of household saving ( graph 3 ). graph 2 graph 3 against this background, the chinese government ’ s stimulus policies adopted amid the global financial crisis led to a boom in debt - funded infrastructure investment and construction of residential and commercial properties. while these policies supported china ’ s economic activity and promoted urbanisation, they also exacerbated what was arguably an already “ unbalanced ” pattern of growth and the rise in debt contributed to the emergence of substantial financial risks. bis central bankers ’ speeches moderating growth in china despite the stimulus following the global financial crisis, annual growth peaked in 2007 ( graph 4 ). as an aside, it is worth remembering that while china ’ s growth is slower than it was 10 years ago, its contribution to global output growth is greater now because the chinese economy is so much larger than it was. in terms of output, the moderation in growth has been reflected in a slowdown in the industrial sector, while growth in the services sector has been more resilient. at the same time, on the expenditure side of the ledger, investment growth has declined while consumption growth has been relatively persistent. graph 4 the moderation in the growth of overall activity reflects a combination of longer - term and shorter - term factors. one prominent long - term factor has been the reversal of china ’ s “ demographic dividend ”. the working - age population has reached its peak and is in decline. 2 a second persistent factor is the decline in the growth of productivity. 3 both labour and total factor productivity experienced periods of rapid growth in the 1980s, 1990s and early 2000s following market - oriented reforms and increased openness to trade and investment ( graph 5 ). urbanisation also underpinned high rates of productivity growth as people moved from relatively unproductive jobs in agriculture to more productive jobs in cities. however, since the late 2000s productivity growth has declined, as the positive effect of earlier reforms faded. the relaxation of the one - child policy is unlikely to have a substantive effect on population ageing, at least not in the short - to - medium term ( lim j and a

the stable prices : the central banks. therefore the bottom line of the inflation - targeting regime is the management of the expectations. if expectations are anchored to the target, wage earners and price setters will behave in such a way that, at the end of the period, the target will be reached. then the question is, how can we anchor expectations? the answer is : by building credibility through delivering what is promised. once this is achieved, the volatility in interest rates, inflation and output would be lower. how do we build credibility? central banks can do this by anchoring inflation expectations through establishing a good track record and by demonstrating that the central bank adjusts its policy rates appropriately in response to the changes in the inflation outlook. this behavior is known as the central bank reaction function. that is to say, in order to keep the inflation in line with the target, the central banks react to economic news in a more or less predictable manner. as economy changes over time, the available data set also changes. we get some of our guidance from the analysis of these data by using models or econometric tools. models are useful but they are not sufficient ; in formulating our decision we do and must put some weight on judgments as well. this is known as the art side of the monetary policy. central bank of turkey has been able to bring down inflation from 70 % in 2001 to 7. 7 % at the end of 2005. although the structural reforms over the last five years have been critical in the fight against inflation, the new monetary framework of inflation targeting also played an important role. inflation expectations have somewhat been successfully anchored to the target, notwithstanding some deviations and deteriorations lately. at the end of may 2007, the central bank of turkey is faced with a considerable credibility gap. our strong reaction in 2006 have contained inflation expectations and we predict that inflation expectations will continue to move towards the medium term target of 4 percent as the headline inflation comes down in the next couple of months. however, it should be noted that there are also other important factors in determining the inflation expectations, such as incomes policy and the course of fiscal policy, or political aspects, etc. apart from short - term interest rates, communication skills are also critical tools in guiding the expectations towards the target. what we do is important, but equally important is how we convey this to our target audience. that is not only what we communicate but also to whom we communicate. of course the target audience of