and their different projects should be offset by different risk premiums charged. this requires the commercial banks to charge interest to offset and cover the risk premiums, which is also for the purpose of absorbing losses from defaults which have low probability of occurring and account for only a small portion of the total loans. the nature of banking business is to take deposits, issue loans and make profits out of interest spreads. not all loans issued can be recovered. there is always a percentage of loans that result in losses and need to be absorbed by higher interest rate income. thus, it is crucial for banks to be able to decide on the prices charged to different clients so that they can prevent large amount of npls from forming or be able to dispose of them. if a one - size - fit - all interest rate is charged to different types of enterprises, the loss of some risky loans would not be covered. if accumulated, even losses on a small scale could evolve into large amount of npls. in sum, the progress of interest rate reform will have a bearing on the source and disposal of npls. market - based interest rate should not only be reflected in pricing of loan products and other assets, but also be extended to pricing of all kinds of services and deposits. in absence of good customers, the commercial banks could adjust their business strategy in two directions : one is to reduce activities on the asset side and expand business on intermediate service, which surely involves pricing of services ; the other is to cut business on both the liability side and the asset side. active management of the liabilities, either expansion or reduction, would surely require commercial banks to exercise discretion in pricing products on the liability side of the balance sheet, including deposits. in this regard, deposit interest rates shall remain flexible too. 3. commercial banks shall be allowed to make full provisioning and write off losses. the related tax polices shall be revised accordingly. bank loans are always subject to a certain degree of economic risks, and at some stage of business operation, the financial risks faced by banks are rather high. the commercial banks have to rely on operational income and profits to offset losses. we can see that in mature economies, banks are required to put aside all kinds of reserves, including risk reserves and others to guard against different types of risks. in the case of china, for a long time, commercial banks were not allowed to make full provisioning. one reason was that the reforms of commercial banks had not been completed. the other

by 1. 2 percent in the same period year - on - year, the august cpi registered a 0. 5 percent increase from the previous month. money growth accelerated in the first eight months, with m2 and m1 up 28. 5 percent and 27. 7 percent respectively, resulting in a credit growth of 34. 1 percent. the renminbi exchange rate remained stable. the domestic demand has become the dominant source of growth. the package of macroeconomic measures in response to the global financial crisis – suited to the chinese circumstances – has proven to be timely, forceful, and effective, and has helped reverse the sharp decline in growth. the projected growth target for this year is within reach. efforts are also being made to contain fiscal and financial risks. the government intends to limit the fiscal deficit and public debt to around 3 percent and 20 percent of gdp, respectively. the banking system has improved its asset quality and resilience to shocks. the nonperforming loan ratio of the banking sector declined by 0. 64 percentage points in the first six month to 1. 8 percent at end - june. and their capital adequacy stood at 11. 1 percent. the chinese government is faced with an uncertain global environment. in the first eight months, exports dropped by 22. 2 percent while imports, by 22. 7 percent. the task for structural adjustment remains formidable. while the effect of the supportive policies is expected to phase out, the measures aimed at addressing longer - term issues will take time to yield results. the government is committed to maintain stable and consistent macroeconomic policies while accelerating structural adjustment. promotion of domestic demand, particularly consumption, will remain a top priority. in this regard, the government is committed to maintain a reasonable investment growth, improve investment structure, and enhance efficiency by eliminating inefficient capacity and encouraging merger and restructuring. it will continue to restructure and revitalize key industries, encourage innovation, and improve the people ’ s livelihood. it will monitor closely the developments in the domestic as well as the global economy and stand ready to take contingent actions, as necessary. china will also remain vigilant against various potential risks, including the risk of inflation, and sustain strong economic growth. against the economic rebound in mainland china and easing of the downside risks in the global economy, the hong kong sar economy in the second quarter recorded a 3. 3 percent rebound over the previous quarter, and the decline in exports moderated. total employment stabilized and the