In the first three quarters of 2003, the Chinese economy maintained the good momentum of rapid growth in spite of various difficulties. GDP increased by 8.5 percent and CPI rose by 0.7 percent over the same period of 2002.
Since the beginning of this year, money and credit increased at a fast speed. Entering May, broad money (M2) kept growing by over 20 percent. New loans extended during the first half of this year almost equaled the total amount of Year 2002. Robust growth of money and credit has strongly supported economic development. However, if nothing is done to reign in the excessive growth, it will probably further encourage duplications of constructions at low levels and exacerbate potential systemic risks, thus affecting sustainable development of the national economy.
The People's Bank of China (PBC) cherished the good growth momentum, and continued to implement the sound monetary policy. Economic means were extensively applied to control the faster than desired money and credit growth, including strengthening open market operations, raising the reserve requirement ratio by one percentage point, which ensured proper control of the fast expansion of money and credit.
In the first three quarters, broad money M2 grew by 20.7 percent over the same period of 2002 to RMB21.4 trillion yuan, while narrow money M1 grew by 18.5 percent to RMB7.9 trillion yuan. At end-September, total loans in both renminbi and foreign currencies by financial institutions (including foreign-funded ones) reached RMB16.7 trillion yuan, a growth of RMB2.7 trillion yuan over the beginning of the year and an acceleration of RMB1.3 trillion yuan over the same period of last year. In particular, renminbi loans by financial institutions grew by RMB690.5 billion yuan in the third quarter, 282.3 billion yuan less than the growth in the second quarter. Both interest rate and exchange rate of renminbi remained stable and financial industry broadly performed well.
In the coming months, the PBC will make sustained efforts and adopt a comprehensive, coordinated and sustainable development approach to maintain the sound performance of the economy. As the central bank, the PBC must be more forward-looking and scientific in the making of monetary policy and in the exercise of financial management. The sound monetary policy will continue to be implemented with flexible employment of various policy instruments to maintain the effectiveness of monetary policy seen in the first three quarters and to guide steady growth of the monetary aggregates. Interest rates of RMB deposits and loans and the money market will be kept basically stable. Market-based interest rate reform will be steadily advanced, and the interest rates formation mechanism based on market supply and demand of financial resources will be gradually established and improved. The RMB exchange rate will be maintained basically stable at an adaptive and equilibrium level. As financial reforms deepen, the mechanism for determining the RMB exchange rate will be further studied and improved to promote balance of payments equilibrium. The development of money market will be accelerated and its financing role will be enhanced. Continued efforts will be made to support the development of capital market to increase direct financing. "Window Guidance" will continue to be applied as appropriate to warn financial institutions of potential credit risks.
Part One Monetary and Credit Performance
In the first three quarters of 2003, the performance of the national economy was broadly strong. The People's Bank of China (PBC) continued to implement the sound monetary policy, conscientiously carried out the preemptive adjustment and fine-tuning, brought into full play the dominant role of economic means in the new round of economic restructuring, and made strenuous efforts in preventing systemic financial risks. The trend of faster than desired increase of credit since the beginning of the year began to be reined in, the financial performance was broadly steady and the exchange rate of RMB remained stable.
I. Continued rapid growth of money supply
In the first three quarters, broad money M2 grew by 20.7 percent over the same period of 2002 to RMB21.4 trillion yuan. In particular, it grew 18.5 percent in the first quarter, 20.8 percent in the second quarter, and 21.6 percent by the end of August when it was at the highest level. Narrow money M1 grew by 18.5 percent to RMB7.9 trillion yuan. Cash in circulation M0 grew by 12.8 percent to RMB1.8 trillion yuan. Cumulative net cash injection during the first three quarters reached RMB102.8 billion yuan, 48.4 billion more than the same period of 2002. The growth of M2 and M1 represented an acceleration of 3.9 and 1.7 percentage points respectively over the beginning of the year, and M2 growth was 11.5 percentage points higher than the sum of GDP growth and CPI increase.
Figure 1 Quarterly Movements of Growth Rates of M0, M1 and M2 between 1998 and September, 2003
Source: PBC Quarterly Statistical Bulletin (Beginning from 2000, M2 includes margin deposits for stock trading)
II. Increase of loans by financial institutions still too fast
At the end of September, total loans in both renminbi and foreign currencies by financial institutions (including foreign-funded ones) increased to RMB16.7 trillion yuan, a growth of RMB2.7 trillion yuan over the beginning of the year and an acceleration of RMB1.3 trillion yuan over the same period of last year. In particular, renminbi loans grew by RMB2.5 trillion yuan over the beginning of the year, 624 billion yuan more than the total loan increase during the whole year 2002 and representing an acceleration of RMB1.1 trillion yuan over the same period of 2002; while foreign currency loans grew by USD23.8 billion over the beginning of the year, representing an acceleration of USD17.9 billion.
Of the increase of renmibi loans, that for the first quarter was RMB808.2 billion yuan, an acceleration of RMB475.8 billion yuan over the same period of last year; that for the second quarter was RMB972.8 billion yuan, an acceleration of RMB475.2 billion yuan. After the SARS epidemic, the PBC strengthened the adjustment and control on the total credit, and the acceleration of loans by financial institutions began to slowdown starting from the third quarter. Renminbi loans by financial institutions grew by RMB690.5 billion yuan in the third quarter, 282.3 billion yuan less than the growth in the second quarter while still representing an acceleration of RMB166.4 billion yuan over the same period of 2002. At present, the growth of loans by financial institutions is generally still faster than desired.
Figure 2 Quarterly Movements of Growth of Loans in renminbi
between 1998 and September, 2003
Source: PBC Quarterly Statistical Bulletin (Starting from 2003, loans by foreign-funded financial institutions are included.)
Box 1 Analysis of Current Loans Structure
Loan structure is of great significance to economic structural adjustment. In 1998, the quota control on credit was abolished. The PBC implemented "administration of guidance planning" on loans by commercial banks. The structure and quantity of loans were determined by discretion of commercial banks in line with the laws, policy guidelines and lending principles.
In recent years, the structure of loans by banks has gradually been optimized. In terms of sources of loans, loans by wholly state-owned commercial banks are still dominant. The share of those by joint-stock commercial banks and by rural credit cooperatives (RCCs) is, however, increasing gradually. At the end of 2002, shares of loans by wholly state-owned commercial banks, policy banks, joint-stock commercial banks and RCCs are 56.4 percent, 12.6 percent, 12.2 percent and 10.5 percent respectively. Of the increase of renminbi loans during the first three quarters this year, wholly state-owned commercial banks, policy banks, joint-stock commercial banks and RCCs accounted for 51.1 percent, 5.6 percent, 22.7 percent and 12.7 percent respectively. In terms of the destination flow of loans, the new loans mainly went to the five areas of loans for discounting commercial bills, loans for infrastructure and technological innovation, consumer loans, agricultural loans and short-term industrial loans, accounting for 70 percent of increase of total loans by financial institutions in the same period. The five areas of destination flow of loans generally follow the guidance of macro policies. In terms of locality structure, new loans clearly concentrate on economically developed regions.
While loan growth accelerates by a big margin, the structure of loans continues to improve and efficiency of credit fund utilization is further enhanced:
Firstly, loans to small- and medium-sized enterprises (SMEs) increased. According to the statistics by the PBC Credit Information Reporting System, in the first half of 2003, loans to SMEs accounted for 51.7 percent of the total loans, up 0.7 percentage points over the same period of last year. Loans for commercial bills grew immensely and became the important source of funds for SMEs. In the first three quarters, loans for discounting commercial bills grew by RMB457.9 billion yuan, representing an acceleration of RMB291.6 billion yuan over the same period of last year. During the period from January to August, cumulative amount of acceptance of commercial bills reached RMB1.7 trillion yuan, over half of which was attributed to that for SMEs. According to the surveys conducted in Beijing and Shanghai, 59 percent of commercial bills accepted was devoted to SMEs while 63 percent of the total discount loans were injected into SMEs. Loans for privately-owned enterprises and self-employed workers also grew enormously, with growth in the first three quarters standing at RMB35.2 billion yuan, an acceleration of RMB11.7 billion yuan over the same period of last year.
Secondly, agricultural loans accelerated conspicuously. Cumulative agricultural loans in the first three quarters reached RMB651.5 billion yuan, an increase of RMB149.3 billion yuan or 30 percent over the same period of last year. In the third quarter, while the growth of loans slowed down, loans to RCCs continued to accelerate by a big margin, representing an acceleration of RMB47.6 billion yuan over the same period of last year.
Thirdly, loan turnover sped up. In the third quarter, the turnover of loans by banks and credit cooperatives amounted to 1.02 times, 0.18 times greater, or 77 days shorter in terms of turnover period, over the same period of last year. In particular, cumulative loans to privately-owned enterprises and self-employed workers grew as fast as 82 percent, with turnover accelerated by 0.26 times or turnover period shortened by 54 days over the same period of last year. The problem for SMEs to acquire loans has furthered been eased.
At present, however, there are still some problems in loan structure that deserve attention. First, mismatching of maturity structure of the assets and liabilities in financial institutions exacerbates, and potential liquidity risk becomes more prominent. In recent years, such long- and medium- term credit businesses as loans for infrastructure and individual housing loans by commercial banks developed quickly. At the end of the third quarter, the ratio of long- and medium-term loans to the total loans by financial institutions arrived at 39 percent, 18 percentage points higher over the end of 1997. Of the sources of deposits, time deposits accounted for 43 percent, 10 percentage points lower over 1997. In terms of newly-increased amounts, it became clearer that the fund sources tended to be more short-termed and fund use more long-termed. In the first three quarters, long- and medium-term loans accounted for 46 percent of all loans and time deposits for 43 percent of all deposits sources. Taking into account that a considerable part of time deposits were those with maturities less than one year, the mismatching of maturities of assets and liabilities would be more obvious.
Second, real estate loans accounted for an unduly high share in the newly-increased long- and medium-term loans. In particular, increase of high-risk housing development loans was too big. In the first three quarters, various real estate loans (including housing development loans and individual housing loans) grew by RMB426.4 billion yuan, accounting for 37 percent of the total growth of all long- and medium-term loans. In particular, real estate development loans grew by RMB135.0 billion yuan, representing an acceleration of RMB100.6 billion yuan over the same period of 2002. Vigilant attention should be attached to the potential systemic credit risk in the fast growth of real estate loans, particularly real estate development loans.
Third, total non-performing loans (NPLs) decreased at a slow pace while losses out of NPLs were still on the rise. It is still an arduous task to reduce NPLs, lighten the historical burden and resolve the financial risk.
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III. Steady growth of renminbi deposits and slight decrease of foreign currency deposits
At the end of September, total deposits in renminbi and foreign currencies of financial institutions increased by RMB3.2 trillion yuan over the beginning of 2003 to RMB21.5 trillion yuan, representing an acceleration of RMB880.8 billion yuan over the same period of 2002. In particular, renminbi deposits increased by RMB3.2 trillion yuan over the beginning of the year, representing an acceleration of RMB946.4 billion yuan over the same period of the previous year. Foreign currency deposits dropped by USD2.56 billion (while they grew by USD5.36 billion in the same period of 2002), decelerating by USD7.92 billion over the same period of last year.
Corporate deposits and household savings deposits kept fast growth. At the end of September, corporate deposits in renminbi and foreign currencies by financial institutions increased by RMB1 trillion yuan over the beginning of 2003 to RMB7.4 trillion yuan; household savings deposits grew by RMB1.38 trillion yuan to RMB10.8 trillion yuan. In particular, savings deposits in renminbi grew by RMB1.4 trillion yuan over the beginning of 2003, representing an acceleration of RMB344.0 billion yuan over the same period of the previous year; corporate deposits in renminbi increased by RMB1 trillion yuan, representing an acceleration of RMB374.3 billion yuan.
Figure 3 Quarterly Movements of Growth of Loans in Renminbi and Foreign Currencies by Financial Institutions since 1998
Source: Sources and Uses of Credit Funds of Financial Institutions (Starting from 2002, deposits in renminbi include those of foreign-funded financial institutions.)
IV. Rebound in growth of base money and decrease of the reserve ratio of financial institutions
At the end of September, the balance of base money of the central bank reached RMB4.6 trillion yuan, representing an increase of 16.8 percent from a year earlier, an acceleration of 4.9 percentage points from the growth rate recorded at the beginning of 2003 and one of 10.1 percentage points from that recorded at the end of June. The growth rate of base money rebounded at the end of the quarter mainly because the PBC injected some short-term liquidity as a result of the rise of demand for cash in the market during the National Day Holiday and freezing of funds for initial public offerings by Huaxia Bank etc. Meanwhile, the one percentage hike of the reserve ratio for deposits also increased some base money accordingly.
At the end of September, the reserve ratio of financial institutions averaged 3.52 percent. In particular, that of wholly state-owned commercial banks averaged 3.34 percent, that of joint-stock commercial banks 4.63 percent and that of RCCs 3.99 percent. The performance in the first three quarters indicated that the reserve ratio of financial institutions dropped. In particular, that for the first quarter stood at 5.1 percent, that for the second quarter at 3.9 percent. Financial institutions, however, held securities in renminbi worth of RMB2.8 trillion yuan, representing 18 percent of total loans in renminbi in the same period. The securities can be converted for liquidities at any time in the inter-bank market. In general, the liquidity of financial institutions was normal.
Figure 4 Quarterly Movements of Growth of Base Money and
Reserve Ratios of Financial Institutions since 2000
Source: Sources and Uses of Credit Funds of Financial Institutions
V. Broad stability of interest rates and increase of interest rates in the money market
Since the beginning of this year, the official interest rates for deposits and loans prescribed by the PBC remained stable broadly. Since the interest rate cut on February 21, 2002, there was no adjustment in the official interest rates for deposits and loans by financial institutions. The current interest rate for 1-year time deposits is 1.98 percent, while that for the 1-year loan is 5.31 percent, with both at record-low levels. For large amount deposits with a maturity of 61 months, the interest rates were mainly in the range of 3.1 to 3.3 percent in the first quarter, 3.1 to 3.2 percent in the second quarter and 3.1 to 3.5 percent in the third quarter.
The interest rates for deposits and loans in foreign currencies dropped. Based on interest rates changes in the international market, the PBC lowered the interest rates for small amount deposits in foreign currencies on July 2, and the cut, in turn, brought about the decrease of interest rates of large amount deposits in foreign currencies and loans in foreign currencies. In August, the weighted average interest rate for US dollar deposits with maturities ranging from 3 months to 6 months, which held the largest share in large-amount deposits in foreign currencies, was 0.8408 percent, down 0.1108 percentage points from 0.9516 percent in June. The weighted average fixed interest rate of one-year US dollar loans was 2.4865 percent, down 0.104 percentage points from 2.5905 percent in June while the weighted average floating interest rate was 2.3563 percent, down 0.0602 percentage points from 2.4165 percent in June.
The interest rates in the money market increased. In the first quarter, the monthly weighted averages for inter-bank lending rates were 2.16 percent, 2.13 percent and 2.06 percent respectively, those for interest rates of bond repo were 2.28 percent, 2.25 percent and 2.04 percent respectively. In the second quarter, the monthly weighted averages for inter-bank lending rates were 1.98 percent, 2.02 percent and 2.11 percent respectively, those for interest rates of bond repo were 1.97 percent, 2.04 percent and 2.17 percent respectively. In the third quarter, the monthly weighted averages for inter-bank lending interest rates were 2.15 percent, 2.19 percent and 2.69 percent respectively, those for interest rates of bond repo were 2.2 percent, 2.24 percent and 2.93 percent respectively.
VI. Continuing increase of official foreign exchange reserves and stability of renminbi exchange rate
In the first three quarters of the year, the balance of payments remained broadly in strong position, with foreign exchange purchased by banks exceeding that sold in the market. At the end of September, the official foreign exchange reserves reached USD383.9 billion, up USD97.5 billion over the beginning of this year. The renminbi exchange rate remained stable, being at RMB8.2770 yuan against one US dollar.
Part Two Monetary Policy Conduct
Robust money and credit growth since the beginning of the year has strongly supported economic development. However, it has also been noted that if nothing is done to reign in the excessive money and credit growth, it will further encourage duplications in constructions at low levels and exacerbate potential systemic risks. Therefore, the PBC took mainly economic measures to adjust and bring the excessive growth under control.
I. Sterilization operations through the open market intensified
Since the beginning of the year, serialising the base money growth resulted from foreign exchange purchase has been the focus of monetary policy operations. The PBC issued central bank bills and carried out repurchase operations to sterilise base money growth. Open market operations in Q3 were particularly challenged by complex market conditions. The RMB open market operations went through two phases. The first phase ran from early July to mid-August, during which the PBC continued to issue central bank bills, intensified its efforts to withdraw the excessive liquidity of the commercial banks, and ensured smooth growth of base money. In this phase, RMB105 billion yuan was withdrawn through open market operations. The second phase ran from end-August through end-September during which pre-emptive operations were carried out to address the sudden liquidity demand of the commercial banks. Central banks bills issue was scaled down in a timely fashion and 7-day reverse repos were carried out to provide short-term funds for the commercial banks and alleviated their liquidity shortage. As an important component of the reserve requirement policy and necessary market arrangements, the PBC also redeemed some central bank bills at the end of September to cover the liquidity gap of some small and medium-sized commercial banks to satisfy the 7 percent reserve requirement ratio. Net release of base money in this phase was RMB91 billion yuan.
Open market operations are highly flexible in that they manifest the overall trend and stance of the monetary policy, at the same time, are able to iron out the volatilities of liquidity and financial markets from either seasonal or sporadic factors by fine-tuning the direction and intensity at a given period of time, and thus reduce the noise in the financial markets. Open market operations since late August, through the instruments and maturity structure of the operations, have made clear the intention of the central bank to maintain steady growth of base money, and at the same time, have addressed the temporary liquidity shortages caused by policy, sporadic and seasonal factors. In this flexibility and robustness lies the very life of open market operations.
Between April 22 and September 20, the PBC offered RMB545 billion yuan in 42 issues of central bank bills. Issues of 3-, 6- and 12-month maturity were RMB300 billion yuan, RMB155 billion yuan and RMB90 billion yuan respectively. On September 30, central bank bills outstanding was RMB425.43 billion yuan. In the first 9 months of the year, the PBC withdrew an accumulated RMB334.6 billion yuan of base money through open market operations and released an accumulated RMB650.5 billion yuan through foreign exchange operations, resulting in a net release of RMB315.9 billion yuan.
II. Reserve requirement ratio was raised by one percentage point
Since the beginning of the year, excessive growth of bank loans has been observed, a phenomenon related to the overall abundant liquidity in the financial system. The PBC issued central bank bills and carried out other sterilising operations. However, central bank bills are relatively short-term instruments and have their constrains in sterilising persistent growth of base money as a result of growth in foreign exchange reserves. More powerful measures were called for and a hike in reserve requirement ratio proved an effective policy measure in absorbing liquidity. In order to alleviate the pressure on central bank bills in withdrawing liquidity, and prevent excessive growth of aggregate money and credit, with the consent of the State Council, the PBC raised the reserve requirement ratio on September 21, 2003 by one percentage point, from 6 percent to 7 percent.
This latest adjustment of the reserve requirement ratio had three features. First, it was announced one month ahead of the effective day to leave enough space for liquidity management of the financial institutions. Second, one percentage point hike in reserve requirement ratio translated into freezing RMB150 billion yuan excessive reserves of the commercial banks, or 6 percent of their holdings of government securities, financial bonds and central bank b
