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

the neutral stance of the monetary policy, the pbc will employ a mix of monetary policy instruments and adjust positions of commercial banks to an appropriate position. secondly, another priority for the monetary policy and financial policy in 2006 is to optimize the allocation of fund while adjusting the aggregate size. bank credit is of an excessively high proportion while direct financing channels are not readily available. this has become a bottleneck in economic performance. the pbc will continue to promote the development of bond market, encourage financial product innovation, build market infrastructure and improve the functions of market for the rapid and sound development of the financial market. we will gradually carry out piloting asset securitization business, and expand the issuance volume of enterprise short - term financing bills. research on expanding the methods and ways of direct financing by enterprises at the inter - bank market will continue in order to launch new products at an appropriate time. financial derivative products innovation will be promoted. we will also improve the market maker and broker system and build a bond registration and custody system. the pbc actively supports the development of fund management sector, nurture institutional investors and gradually expand piloting project of bank invested fund management companies, improve security investment instruments that serve the public, help the transformation of deposits into investment and expand the channels for fund flow into the equity market. thirdly, the pbc will cooperate with the relevant authorities to promote the adjustment of economic structure and maintain external sector balance. rapid increase of foreign exchange reserve and the issue of rmb exchange rate has been the focus of people ’ s attention. rapid increase of foreign exchange reserve reflects the imbalance of external sector, and is a result of our policy of encouraging export and fdi inflow and restricting the outflow of capital. in order to achieve external sector balance, we need to promote structural adjustment through policies and gradually correct the imbalances. the first part of adjustment is to change the foreign exchange policy of restricting outflow and attracting inflow. the second part is to expand the channels of foreign exchange fund use, change the situation of foreign exchange held by the state and enable the people to hold more foreign exchange. thirdly, capital inflow and outflow channels will be expanded gradually, and overseas investment will be promoted in a sound manner. a complete foreign exchange management system will be built to encourage overseas investment. exchange rate flexibility contributes to adjustment of bop structure. yet, large fluctuation of exchange rate is not conducive to sound performance