2004 First Quarter China Monetary Policy Implementation Report

Author: People's Bank of China Monetary Policy Analysis Group
Publisher:
Publish Date: 2004-07-01
Features: The global economy started the first quarter of 2004 with strong growth, as more countries and regions joined the ranks of economic recovery and growth. China's economy continued to grow rapidly, with a 9.7% increase in gross domestic product (GDP) in the first quarter. Urban and rural incomes, corporate profits, and fiscal revenue all saw significant increases. Agricultural production was moving in a positive direction, and foreign trade showed strong momentum. At the end of March, the broad money supply (M2) stood at 2.32 trillion yuan, up 19.1% year-on-year. In the first quarter, financial institutions actually increased loans by 835.1 billion yuan, accounting for 32% of the annual target of 2.6 trillion yuan, an increase of 24.7 billion yuan year-on-year. Attention should also be paid to the systemic risks implied by the "short-term deposits, long-term loans" phenomenon among financial institutions. At the end of March, the total deposits of financial institutions in both local and foreign currencies reached 2.33 trillion yuan, up 19.6%. The reserve base of the People's Bank of China stood at 505 billion yuan, a decrease of 178.8 billion yuan from the beginning of the year. The average excess reserve ratio of financial institutions was 4.28%, 0.84 percentage points lower than the same period last year. At the end of March, China's foreign exchange reserves reached 439.8 billion U.S. dollars, an increase of 36.5 billion U.S. dollars from the end of last year. The exchange rate of the renminbi remained stable at 1 U.S. dollar to 8.2771 yuan. In the first quarter of 2004, in line with the deployment of the Central Economic Work Conference, the People's Bank of China continuously strengthened and improved financial regulation, using a variety of monetary policy tools to control the total and structure of money and credit, while placing high emphasis on preventing inflation and accelerating institutional development in financial regulation:
1. Increasing the intensity of open market operations to fully offset the liquidity released by foreign exchange deposits.
2. Raising the deposit reserve ratio by 0.5 percentage points.
3. Establishing a positive incentive mechanism and implementing a differentiated deposit reserve ratio system.
4. Establishing a floating interest rate system for rediscount loans to rationalize the interest rate relationship between the central bank and borrowers, with rediscount rates for all categories of rediscount loans increased by 0.63 percentage points and rediscount rates increased by 0.27 percentage points.
5. Strengthening window guidance for commercial bank loans to promote the optimization of loan structure.
6. Supporting the development of the rural economy and accelerating the reform of rural credit cooperatives.
7. Actively promoting the development of the money market and enhancing the management and service of the money market.
8. Maintaining the basic stability of the renminbi exchange rate at a reasonable and balanced level to promote balance in international payments.
Overall, the regulatory measures taken since 2003 have yielded results and are now in effect. While fully recognizing the new achievements in economic and social development, it is also necessary to clearly acknowledge some new contradictions and issues in the current economic operation, most notably the excessive scale of fixed-asset investment, which has led to a rapid growth in credit issuance.
For 2004, the expected macroeconomic regulatory targets were a growth rate of around 7% and a consumer price index (CPI) increase of around 3%. It is worth noting that GDP growth and CPI inflation will remain relatively high in the second quarter but are expected to decline in the second half of the year. There are two main reasons for this:
1. The base period effect: In the second quarter of 2003, GDP growth was only 6.7% due to the impact of the SARS epidemic. Therefore, GDP growth in the second quarter of 2004 is expected to be relatively high. Considering the tail effect and seasonal factors, the year-on-year CPI is expected to rise after April, and begin to decline in the third quarter.
2. The transmission process of macroeconomic regulatory policies: The effects of policies implemented since 2003 will become more apparent in the second half of 2004.
The People's Bank of China will adhere to the spirit of the Central Economic Work Conference and the requirements of the Government Work Report, firmly establish and implement a scientific development concept, and ensure the implementation of the central's various arrangements. Based on changes in the economic and financial situation, targeted regulatory measures will be taken to moderately control the growth of money and credit, improve the transmission mechanism of monetary policy, and it is expected that the monetary and credit regulatory targets set at the beginning of the year can be achieved, namely a growth rate of around 17% for broad money supply (M2) and narrow money supply (M1), and an increase of approximately 2.6 trillion yuan in new RMB loans from all financial institutions.
The orientation of a steady monetary policy in the next phase is to moderately tighten, avoid a sudden halt, prevent sharp fluctuations, and promote stable economic development. This includes:
1. Appropriately tightening liquidity in the financial system to control the rapid growth of money and credit.
2. Closely monitoring changes in price trends and steadily advancing interest rate liberalization reforms.
3. Strengthening structural adjustments to avoid a "one-size-fits-all" approach.
4. Actively promoting the development of financial markets and expanding direct financing.
5. Maintaining the basic stability of the renminbi exchange rate at a reasonable and balanced level.
6. Providing financial support for pilot reforms of rural credit cooperatives to promote their transformation of operational mechanisms.