price index of raw materials, fuel and power rose by a total of 35. 6 percent, partly due to price hike on the international market and partly as a result of manufacturing and export expansion domestically. as china ’ s economic development enters a new stage, growing public awareness of resource scarcity and environment protection adds to the pressure of energy and resource price adjustment. in short, production factor price will have to be adjusted regardless of the balance of payments ( bop ) status. 2. the adjustment of production factor prices in a broad sense is an important component of china ’ s economic system reform. the chinese government has emphasized the need and made continued efforts to adjust the structure of income distribution, including raising the share of household income, promoting price reform of energy products such as petroleum, gas, water and electricity to have in place a more reasonable price system for basic products, raising pollution charge and fee standards for sewage and garbage treatment to deepen the reform of environment protection charges. in addition to direct price adjustments, measures have been adopted to reinforce law enforcement examination on environmental protection, keep market in order, forbid defaulting on wage payment to migrant workers, set a ceiling for maximum working hours and etc. all these measures will lead to a rise in the production factor price in general. when adjusting factor prices, usually consideration will be given to how to handle the relations between reform and inflation on the one hand and between reform and primary income distribution and redistribution on the other hand, and whether to compensate those affected negatively by such adjustments. therefore, the adjustment of production factor prices needs to be planned and designed as an integral part of the whole reform package. 3. adjustment of production factor prices and exchange rate movements can substitute and complement each other. the central economic work conference outlined the goal of expanding domestic demand and lessening the reliance on net export in the pursuit of national economic development, restructuring and growth pattern upgrade. further reform of the exchange rate regime and adjustment of production factor prices in a broad sense both contribute to the goals above. rapid adjustment of production factor price help ease appreciation pressures and a floating rmb exchange rate regime alleviate upward pressures on production factor prices. the two substitute each other to a certain extent. a proper mix of the adjustment of production factor prices and exchange rate changes based on the economic circumstances will be more effective to serve policy goals than adopting merely one of both. for example, compared with a substantial pay rise without enhancing the flexibility of exchange rate regime, a two - pronged approach will be

into routine business operations. they all incorporate past data about borrowers to predict and rank potential borrowers by the risk of default. these technologies have sharply reduced the cost of credit evaluation and improved the consistency, speed, and accuracy of credit decisions. credit - scoring technologies have served as the foundation for the development of our national markets for consumer and mortgage credit, allowing lenders to build highly diversified loan portfolios that substantially mitigate credit risk. their use also has expanded well beyond their original purpose of assessing credit risk. today they are used for assessing the risk - adjusted profitability of account relationships, for establishing the initial and ongoing credit limits available to borrowers, and for assisting in a range of activities in loan servicing, including fraud detection, delinquency intervention, and loss mitigation. these diverse applications have played a major role in promoting the efficiency and expanding the scope of our credit - delivery systems and allowing lenders to broaden the populations they are willing and able to serve profitably. the use of credit - scoring models, whether turnkey models purchased from providers or proprietary models developed in house, has taught bankers - - sometimes through costly experience - - the value of continually updating the database on which the model operates. indeed, one can speculate that some of the problems this year in subprime credit card losses may well represent an insufficiently long data series to score successfully such credits during a recession. the experience with credit - scoring models underlines the necessity of basing more - sophisticated quantitative approaches, approaches that seem to have served the banking system so well when applied initially, on a longer and larger database of loss experience. let me conclude by noting an often overlooked fact. the use of the more - sophisticated techniques i spoke of earlier, especially the various forms of derivatives, are, by construction, highly leveraged. they are thus prone to induce speculative excesses, not only in the u. s. financial system, but also through out the rest of the world. the greater potential for systemic risk can be contained by improvements in effective risk management in the private sector, including market discipline based on better public disclosure, and by improvements in bank supervision and regulation in the public sector. to be sure, as i have noted elsewhere, there is some level of risk that must be absorbed, as a last resort, by central banks if an economy is to obtain the full resource allocation benefits of financial intermediation. the supervisors of the industrial world have been working together for