, management of the banking sector liquidity has become an important part in the pbc ’ s monetary policy conduct. instruments such as open market operations and reserve requirement ratio have been adopted to sterilize the growth of rmb supply as a result of foreign exchange purchase, and to absorb excessive liquidity in the banking system. nevertheless, the root cause of the liquidity problem has not been solved. the rmb equivalent to foreign exchange purchase has become the major source of base money supply while central bank lending to financial institutions accounts for a smaller share. this undermines the independence of monetary policy and makes money supply a more endogenous factor. in recent years, though cpi has remained basically stable at a fairly low level, broad price levels such as ppi and asset prices such as housing prices have increased significantly. moreover, the issuance of central bank bills and the frequent adjustments of reserve requirement ratio in the banking system have also affected the operational behaviour of commercial banks and even the efficiency of the financial system. the sterilization cost for the central bank has also been on a rise. iii. a more flexible exchange regime helps enhance the effectiveness of monetary policy according to the argument of impossible trinity, capital and financial account convertibility, independent monetary policy and exchange rate stability cannot be achieved at the same time. it is feasible for a small and open economy to pursue exchange rate objectives at the expense of monetary policy independence. the hong kong sar is such an example by adopting a currency board system, where the hong kong dollar is strictly pegged to the u. s. dollar and the hong kong monetary authority follows the federal reserve in its adjustment of hong kong dollar interest rates. as for singapore, exchange rate instruments, rather than interest rates, are used more frequently in macroeconomic management, as exchange rate is taken as the intermediate monetary policy target. china is not a small economy. with a population of 1. 3 billion, china cannot afford to lose monetary policy independence and subject itself to economic policies of other countries. adopting a more flexible exchange rate regime serves china ’ s long - term interests as the benefits of long - term price stability and economic restructuring far exceed the cost in reorganizing certain industries and removing outdated capacities. at present, a more flexible exchange rate regime will help curb inflation and asset bubbles. when domestic inflationary pressures are heightened, a stronger domestic currency will help bring down the price of imports. the role played by exchange rate in easing imported inflationary pressures is particularly important for

is introduced? and what part does emu play in this context? one important factor in the process of industrialisation in the late nineteenth century, when sweden was transformed from poor country into a wealthy nation with almost the world ’ s highest growth rate, was the contemporary development of the financial system. banks were established and financial know - how grew when interest controls had been abolished. as a result, inventions could be exploited and investment in the nascent industries could be financed. a mounting body of research findings published in the 1990s indicates that economic growth in various countries is appreciably affected by how the financial system works : the more highly - developed the financial system, the greater the stimulus to economic growth. an accessible banking system and efficient financial markets contribute to the development of investment and thereby to the economy ’ s growth trend. one conceivable reason why the us economy is being transformed more rapidly than is the case with sweden and, even more so, the european community, is the efficiency with which the us financial system works. corporate financing may well be facilitated by the breadth and liquidity of diverse financial markets. with the rapid development of information technology, moreover, a new type of company has emerged. it differs from the traditional pattern in that its operations involve highly mobile human capital. the financing of these companies accordingly imposes different requirements in markets for risk capital and loans. the us markets for risk capital appear to be more highly developed and more focused on the financing of high - risk projects than seems to be the case in europe, where bank loans predominate and a larger proportion of financing goes to reliable, established firms. with the advent of the euro, the financial system in europe may become more developed and, like its counterpart across the atlantic, offer more alternative forms of financing. with a single currency in the euro area, the capital markets will gradually become more liquid and thereby more efficient. there will probably be more corporate financing with bonds and equity, forms of financing that are less common at present in europe than in the united states. signs of this are already evident. there is reason to make a deeper analysis of the financial system ’ s contribution to the changes that are needed in the swedish economy. the introduction of a single currency may come to play a more important part in this transformation in that it influences the development of europe ’ s financial system. this is an argument in the discussion about emu that i have not encountered hitherto. conclusion sweden has already come a long way