wu xiaoling : improving monetary policy transmission, creating a sound financial environment speech by ms wu xiaoling, deputy governor of the people ’ s bank of china, at the annual conference of china economic forecast, analysis and outlook, beijing, 20 march 2005. * * * in the first two months of 2005, the economy ran smoothly as the supply of money and credit grew steadily. by the end of february, m2 increased by 13. 9 percent yoy ; the rmb loans went up by 13. 4 percent with newly issued mid - and long - term loans accounting for 46. 7 percent, or 4. 5 percentage higher yoy, but 13. 8 percentage points lower than that of last year as a whole, indicating some structural change. during january and february, the fixed investment in the urban areas increased by 24. 5 percent yoy. real estate investment grew by 27 percent, lower than that of the same period last year, but still at a rather high level. new starts continued to grow and projects under construction were of large scale. in january and february, the cpi went up by 2. 9 percent. according to the statistics of the nbs, the ppi jumped by 7. 2 percent yoy. with prices of raw materials, labor and land trending upward and their downstream impacts growing, the inflation pressure is on the rise, even though inflation is still seen as can be controlled within 4 percent for the year. the people ’ s bank of china ( pbc ) will do its best to maintain a stable growth of money and credit through using a range of monetary policy tools. in 2005, the pbc will improve monetary policy transmission to increase the effectiveness while strengthening the preemptive and scientific approach in conducting monetary policy. being an important part of the monetary policy transmission process, the commercial banks shall enhance promptness in responding to macro - developments and contribute to financial stability when maximizing profits and controlling risk. i. the commercial banks shall respond to macro - developments promptly a. generally speaking, legislation and macro - policies aim at maintaining fair competition and efficient allocation of resources, reflecting the overall interests of the whole society. under this framework, a positive interaction is formed among the legislative bodies, macro - adjustment departments and the public, which would also contribute to cushioning big shocks to the economic and social development. policy circumvention may in some cases reflect the reactions of micro - entities to the deficiencies in macro - policies. however, with the goals

in order to create a certain kind of tenancy and leasing market for the housing industry, and in order to ensure the housing mortgage loans be backed by indisputable securities, the real estate developers must utilize equity financing as the main form. as the real estate industry is a high - risk as well as a high - return industry, the problem of matching risks and returns shall only be better resolved with equity financing mode taking the dominant position. according to information provided by the report on china ’ s real estate market 2003 ~ 2004, the leverage ratios of china ’ s real estate enterprises are relatively high. the leverage ratios of the top five listed companies in hong kong are basically kept at a level between 30 % to 40 %, while those of domestic real estate companies stand at around 75 %. the report also shows that among the 24. 6 % of the self - raised capital 13. 3 % belongs to self - owned capital. such a high leverage ratio could bring huge loss to debtors once the market risks arise. according to the report, the return on self - owned capital is 21. 17 %, which does not match the risk borne by debtors when compared to the cost of financing. with the maturing of financial markets, the principle of matching risks with returns shall be absorbed into the financing mode for real estate industry, and it is an inevitable trend that the ratio of developers ’ equity financing will be increased. china ’ s economy is now in a transition period when many reforms are not compatible with each other perfectly. when we put forward the reform of housing commercialization and monetarization, the state reduced or halted direct input into the housing industry but failed to open the equity - financing channel to real estate developers. a multi - level capital market has not developed not only to real estate developers but also to all the enterprises, leading to the result that many enterprise flocked to get listed in the stock market. if they did not succeed in the direct financing market but have to develop, the financing burden thus completely falls on banks. in order to support the housing monetarization reform and promote the development of the real estate industry, the people ’ s bank of china has issued a series of credit policies to contribute to the development of real estate credit since 1998. the rapid development of the real estate industry should be a benefactor of the housing credit policy formulated by the pbc, otherwise the real estate industry shall not be so sensitive to the adjustment of the pbc ’ credit policy.