(Money Policy Analysis Group of the People's Bank of China, January 2003)
Executive Summary
In 2002, the Chinese economy performed far better than expected. Real GDP grew by 8 percent, and prices remained at a low level (CPI declining by 0.8 percent). Consumer demands, rapid growth of fixed asset investment and export were the driving forces for economic growth. The first, second and tertiary industries registered synchronized expansion, agriculture performed fairly well and industrial output increased quickly. China became the largest recipient of foreign direct investment in 2002.
The People's Bank of China (PBC) continued to implement the sound monetary policy. First of all, open market operation was more actively used to timely adjust base money. Secondly, interest rates were used flexibly and market-based interest rate reform was pursued prudently. Thirdly, credit policy was used to promote economic restructuring, support small and medium-sized enterprises and agricultural development. Consumer credit also expanded. Fourthly, efforts were made to promote institution building in the money market. Fifthly, the role of monetary policy was boosted in promoting reform and safeguarding financial and social stability. Sixthly, transparency in monetary policy implementation further improved.
In 2002, growth of money supply was accelerated to support economic development. M2 increased by 16.8 percent to RMB18.5 trillion yuan and M1 by 16.8 percent to RMB7.1 trillion yuan. Lending by financial institutions expanded rapidly and loan quality improved. Local currency lending by all financial institutions increased by RMB1.8475 trillion yuan, 603.6 billion yuan more than the increment of 2001. NPLs in financial institutions declined by RMB95.1 billion yuan and the NPLs ratio dropped by 4.5 percentage points. Corporate deposits increased rapidly. Renminbi and foreign currency deposits increased by RMB2.87 billion yuan to RMB18.3 trillion yuan. RMB deposit increased by RMB1.3 trillion yuan to RMB8.7 trillion yuan. Balance of payments was in a strong position with the foreign exchange reserves reaching US$286.4 billion and exchange rate remained stable, being at RMB8.2773 yuan for one US dollar at the year end.
The Central Government Economic Work Conference has identified the major targets for economic development in 2003, including a GDP growth of 7 percent, CPI by 1 percent, growth of M2 and M1 by 16 percent, cash injection at RMB150 billion yuan and lending by financial institutions at RMBl.8 trillion yuan.
The sound monetary policy will be continued in 2003, and preemptive-adjustment and fine tuning will be made if necessary. Financial sector will be given a full play to support economic expansion. First of all, monetary policy instruments of various kinds will be flexibly used to keep appropriate increase of money supply. Secondly, the interest rate and exchange rate policy will be kept stable in the process of market-based interest rate reform. Thirdly, credit policy will be applied to support economic restructuring. Fourthly, credit management will be strengthened to prevent financial risks brought by excessive growth in real estate investment; regulations concerning real estate credit will be strictly followed to manage potential risks. Fifthly, great efforts will be made to develop the money market and improve financial resource allocation.
Content
Part One Monetary and Credit Performance
I. Accelerated growth of money supply and steady improvement of monetary liquidity
II. Significant increase of loans by financial institutions and further improvement in the quality of new loans
III. Rapid growth of corporate deposits and marked increase of household savings
IV. Appropriate growth of base money and adequate liquidity of financial institutions
V. The strong position of balance of payments and stable renminbi exchange rate
Part Two Conduct of Monetary Policy
I. Open market operations were intensified to ensure the steady growth of base money and smooth development of money market rate
II. Flexible interest rate policies were adopted to promote market-based interest rate reform
III. Credit policy was used to support economic restructuring
IV. Efforts were made to promote the institutional building of the money market
V.Monetary policy was employed to promote reform and safeguard financial and social stability
VI. Monetary policy transparency was improved to guide the rational expectations of the public
Part Three Financial Market Performance
I. Active inter-bank local currency market
II. Government securities and policy financial bonds
III. Review of the stock market
IV. Inter-bank foreign exchange transactions grew rapidly
Part Four Macroeconomic Performance
I. Global economic and financial situation in 2002
II. Macro-economic performance in China
III. Industrial performance
Part Five Projections and Outlook
I. World economic and financial outlook of 2003
II. Projections and policy trends of China's economic and financial developments in 2003
III. China's monetary policy stance in 2003
Box 1 Open Market Operations in China
Box 2 Market-based interest rate reform
Box 3 China's Money Market
Box 4 Heightening Global Deflationary Pressure
Chart 1 Movement of Money Supply in 2002
Chart 2 Newly Increased Local Currency Lending by Financial Institutions
Chart 3 Growth of Base Money and Excess Reserve Ratio of Financial Institutions between 2001 and 2002
Chart 4 Trading Volume at Inter-bank Markets
Chart 5 Movement of Monthly-weighted Average Interest Rates in the Money Market
Chart 6 Closing Index of Stock Market at Month End in 2002
Table 1 Issuing Interest Rates of Treasury Bonds in 2002
Table 2 Interest Rates of Bonds Issued by Policy Banks in 2002
Table 3 Financing in Domestic Financial Market
Part One Monetary and Credit Performance
In 2002, the Chinese economy performed well. The People's Bank of China (PBC) continued to implement the sound monetary policy in line with the principles stipulated by the Party and the State Council and encouraged commercial banks to strengthen loan marketing, improve financial services, intensify financial support to economic growth, creating a favorable condition for the sustained, rapid and healthy development of the economy.
I. Accelerated growth of money supply and steady improvement in monetary liquidity
In 2002, broad money M2 grew by 16.8 percent to RMB18.5 trillion yuan, representing a 2.4 percentage points acceleration over the previous year. Narrow money M1 grew by 16.8 percent to RMB7.1 trillion yuan, representing an acceleration of 4.1 percentage points. The liquidity ratio of M1/ M2 was 0.38, 0.49 base points higher than that of the end of the previous year and 2.06 base points higher than the record low at the end of March 2002.
Chart 1 Movement of Money Supply in 2002
