sufficient liquidity of financial institutions and falling trend of money market rates during the first quarter of this year, the pbc intensified sterilization operation. in this period, the cumulative amount of central bill issuance reached rmb 435. 2 billion yuan and outstanding amount stood at rmb 615. 45 billion yuan ; base money injection as a result of forex purchase amounted to rmb 291. 6 billion yuan, and open market operation withdrew rmb 281 billion yuan, resulting in a net base money injection of rmb 10. 6 billion yuan and basically offsetting the forex position of base money. ii. use reserve requirement policy in a flexible way to lower the cost of currency withdraw and improve the operation of commercial banks in order to rein in the obviously excessive credit growth, the pbc raised the required reserve ratio by one pp on september 21, 2003. traditional money and banking theories regard required reserve ratio hike as a relatively drastic measure, nevertheless the central bank interpreted it as a mild move. the major reason is that the central bank has to withdraw a large amount of excess liquidity because of fast growth of foreign exchange reserves, to do so, if the central bank only issue cb bills without any other measure, it has to raise the interest rates on cb bills to a very high level given strong economic expansion momentum and commercial banks ’ wide interest rate differentials which is larger than the returns on cb bills, however, high interest rate would have significant implications on the economy. in contrast, the 1 pp rise of required reserve ratio enabled the central bank to reduced at a lower cost the commercial banks ’ excess reserve by around rmb150 billion yuan, accounting for only 6 % of their holdings of treasury bills, financial bonds and cb bills. therefore, the required reserve ratio hike is actually a mild policy measure. moreover, the policy was announced one month in advance, giving sufficient time for financial institutions to manage their liquidity. the pbc also provided timely support to those financial institutions with short - term liquidity difficulties, so as to maintain the overall stable developments of financial operation and money market interest rates. with the approval of the state council, the pbc announced on march 25, 2004 that the required reserve ratio for financial institutions with capital adequacy ratio below a specific level would rise 0. 5 pp to 7. 5 %, while the ratio for other financial institutions remained unchanged. state - owned commercial banks, urban and rural credit cooperatives were exempt from the differentiated required

, if classified in line with prevalent methods, would have accounted for more than 50 percent of their total assets. they in turn lost confidence in china ’ s state - owned commercial banks, dampening enthusiasm of foreign capital entering china ’ s financial industry. from the perspective of the current situation, however, the reality is much better. at present, the reform of china ’ s state - owned commercial banks has come to the implementation period, and their operational performance has been improving. statistics show that npl ratio of state - owned commercial banks has been decreasing by 3 - 5 percent year - on - year in recent years. the central bank has conducted a survey on the formation and composition of npls of state - owned commercial banks accumulated since the reform and opening to the outside world. the survey indicates that those as a result of imperfect operation and management by state - owned commercial banks didn ’ t account for a high proportion. instead, the npls, historically speaking, came mainly from excessive government intervention, poor legal environment, inadequate management of the customer bases. concretely speaking, of the total npls by state - owned commercial banks, 30 percent was due to intervention by the central and local governments, 30 percent resulted from mandatory credit support to state - owned enterprises, 10 percent arose from poor legal environment and weak law enforcement in some regions, and 10 percent stemmed from industrial restructuring in some enterprises ( including those in the military industry ) by the government through closing down, suspending operation, merging with others or shifting to different line of production. all in all, only 20 percent was ascribed to business operation and management of the state - owned banks themselves. what deserves noting is that attention has been attached to all the above factors in the wake of the asian financial crisis in 1997, and great improvement has been achieved in some aspects. first, the government has basically abandoned administrative intervention in the business operation of the state - owned commercial banks. the government has established from the legal point of view the independence of the commercial banks in the decision - making of loan issuance. second, in terms of policies and regulations, it was stated in the lending guidelines for state - owned commercial banks in the 1980s and 1990s that state - owned commercial banks were required to grant credit support to state - owned enterprises. since the mid - 1990s, however, the government has given up this guideline. at present, state - owned banks have no obligation any longer to extend loans to state - owned enterprises. according to the survey conducted