Monetary Policy in CHINA
In the first half of 2010 the Chinese economy generally performed well and was proceeding in the direction intended by the macroeconomic management policies. Consumption picked up rapidly; investment growth moderated but remained high; foreign trade experienced a fast rebound; the contributions of consumption, investment, and exports to economic development were more balanced; both industrial output and corporate profits went up by a large margin and the Consumer Price Index (CPI) edged up slightly. In the first half of the year, China’s Gross Domestic Product (GDP) stood at 17.3 trillion yuan, up 11.1 percent year on year. The Consumer Price Index (CPI) rose year on year by 2.6 percent.
In accordance with the overall arrangements of the CPC Central Committee and the State Council, the People’s Bank of China (PBC) continued a relatively loose monetary policy, maintained the consistency and stability of its policies, and made policies better targeted and more flexible in response to new developments. It deployed a mix of measures to strengthen liquidity management in the banking system and to guide financial institutions to properly manage the aggregate, pace, and structure of credit provision. The PBC further promoted the RMB exchange rate regime reform, improved foreign exchange administration, and pressed ahead steadily with the reform of financial enterprises, so as to contribute to the stable and healthy development of the economy. With the combined effects of various measures, the growth of money and credit gradually returned from the high level reached in 2009 to the general trend rate, liquidity in the banking system remained generally abundant, the flexibility of the RMB exchange rate was further strengthened, and the financial sector performed in a sound manner.
At the end of June 2010, broad money supply M2 recorded RMB 67.4 trillion yuan, up 18.5 percent from the same period of the last year, a deceleration of 4.0 percentage points. Narrow money supply M1 stood at RMB 24.1 trillion yuan, up 24.6 percent from the same period of the last year, a deceleration of 5.3 percentage points from the end of the last quarter. Deposits at financial institutions grew at a slower pace, with RMB and foreign currency deposits at financial institutions increasing by 18.6 percent year on year, down 3.1 percentage points from the end of the last quarter. Growth of lending by financial institutions moderated and loan extensions were more balanced. By end-June, RMB loans had grown 18.2 percent year on year, a deceleration of 3.6 percentage points from the end of the last quarter, or an increase of RMB 4.6 trillion yuan, representing a deceleration of RMB 2.7 trillion yuan. Lending rates offered by financial institutions went up slightly, with the weighted average lending rate for non-financial enterprises and other sectors standing at 5.57 percent in June, up 0.32 percentage points from the beginning of the year. After the PBC decided to proceed further with the reform of the RMB exchange rate regime on June 19, the largest daily appreciation of the RMB against the US dollar posted 122 basis points (or 0.18 percent). By the end of June the central parity of the RMB against the US dollar registered RMB 6.7909 yuan.
Going forward, the economy is expected to grow in a more stable and sustainable way on the basis of the recent rapid rebound. To boost economic growth, the central government has launched a series of new measures, which will step up adjustments in the economic structure and nurture new growth points. However, given the still complicated and serious conditions at home and abroad, as well as the many uncertainties regarding economic development, macroeconomic management is facing a dilemma. The basis for a global recovery is still fragile and the international financial environment has not yet stabilized. Meanwhile, domestic private investment and endogenous drivers for growth need to be further enhanced, household consumption should be boosted, optimization of income distribution and adjustments of the economic structure are facing difficulties, the tasks of energy-savings and emission- reductions remain arduous, the risks in the fiscal and financial sector call for attention, movements in the price level is not clear, and management of inflation expectations needs to be strengthened.
The PBC will continue to follow the scientific outlook on development and implement the relatively easy monetary policy in line with the overall arrangements of the State Council. It will properly manage the intensity, pace, and focus of the policies and make policies better targeted and more flexible while also maintaining policy consistency and stability. Efforts will be made to strike a balance among supporting sound and relatively rapid development, restructuring the economy, and managing inflationary expectations. The PBC will employ a variety of policy tools to enhance liquidity management so as to maintain proper growth of money and credit, strengthen the sustainability of financial support to economic development, and make sure that the financial system performs in a sound manner. Moreover, the PBC will advance the market-based interest rate reform and the reform of the RMB exchange rate regime to promote the healthy development of the financial market. In addition, it will enhance the role of the market in allocating resources, improve policy coordination, optimize the policy mix, and facilitate systemic reform and economic structural adjustments to contribute to a shift in the growth model and to provide an internal impetus for economic development.