Establish a Consolidated and Efficient Central Bank Macroeconomic Adjustment and Supervision System and Promote the Healthy Development of the National Economy
Governor Dai Xianglong
People's Bank of China
January 27, 1999
China's financial sector developed with commensurate reforms in 1998 and has played a significant role in accomplishing the economic growth target and social stability.
First of all, money supply has been increased appropriately and deflation has been prevented, contributing to the realization of the growth target. By the end of 1998, total assets of the financial institutions (excluding securities and insurance companies) amounted to RMB15,25 trillion, of which the three policy banks had RMB1.38 trillion, the four solely state-owned commercial banks RMB9.5 trillion, other commercial banks RMB1.68 trillion, urban and rural credit cooperatives RMB1.65 trillion, trust and investment companies RMB540 billion and foreign banks RMB280 billion. RMB-and foreign currency-denominated deposits of the financial institutions amounted to RMB10.3022 trillion, registering a growth of 16.2% or RMB1.4375 trillion more than those of the beginning of the year. RMB and foreign currency loans amounted to RMB9.386 trillion, an increase of 14% or RMB1.152 trillion compared with the beginning of the year. Broad money supply grew by 15.3%, 10.1 percentage points higher than the corresponding economic growth and retail price index combined.
Secondly, significant breakthroughs have made in the financial reform. The mechanism of segregated banking, securities and insurance business and augmented supervision has been put in place. Thirty-one provincial branches of the People's Bank of China have been replaced by 9 regional branches, each covering more than one province and 148 sub-branches have been eliminated. The solely state-owned commercial banks are trying to put an end to their duplicated presence by merging their provincial and provincial capital branches.
Thirdly, financial supervision has been strengthened. Risks with some financial institution have been resolved by mergers, acquisitions, debt-equity conversions, closures and bankruptcies. The magnitude of law enforcement and criminal case investigation has been intensified. In recent years, 26,006 persons have been penalized for violating laws, regulations and disciplines.
Fourthly, the enforcement of foreign exchange regulations has been intensified to safeguard the RMB exchange rate stability and the balance of payments. US$6.419 billion was detected as fraudulent purchase of foreign exchange in 1998. A number of underground markets and illegal money exchange have been eliminated.
The central bank functions of the People's Bank of China has been continuously strengthened ever since 1984 when the People's Bank of China started to function solely as the central bank, especially after the promulgation of the "People's Bank of China Law" in 1995. As a result of the financial reform in 1998, a new organizational structure has been established with the unified leadership of the headquarters and 9 regional branches, 326 municipal sub-branches and 1,327 county sub-branches performing respective duties. The new administrative system was initiated on January 1st 1999. The People's Bank of China will take advantage of the unified and vertical leadership mechanism of the central bank, carry out the functions of the central bank by rule of the law and fulfill its responsibilities in order to safeguard the national economic and financial safety and promote the economic development so as to usher China's financial industry with its reform and opening well into the 21st century. The financial reform will be further deepened and accelerated in 1999. An appropriate monetary policy will be adopted and the financial supervision strengthened to effectively fend off the resolve financial risks, improve financial services and promote sustainable, last and healthy economic development.
I. Adjust money supply appropriately, guide commercial banks in exploring markets, and support effective growth of the economy. Broad money is expected to grow by 14-15% in 1999. In this regards, the central bank will (1) issue in a timely manner a guidance plan for lendings by the state banks and monitor the execution of the plan; (2) increase the band and eligibility for floating interest rates on RMB loans and gradually phase out interest rate controls on foreign currency loans; (3) further improve the reserve requirement system and set the interest rate on required reserves reasonably; (4) increase open market operations and provide more trading instruments; (5) gradually improve the money market and expand the trading system of the national inter-bank market.
The central bank will actively support the expansion of domestic demand. Capable commercial banks will be permitted to offer consumer credit, and will be encouraged to provide new products on a trial basis. Lending to the infrastructure sector will be increased, and technical innovation of enterprises will be supported. Export credit, foreign exchange mortgage RMB loans and classified lending guidance based on export receipts ratios will all be used to assist foreign trade enterprises to increase exports. Development assistance will also be provided to small and medium-sized enterprises, and to small towns in the countryside. Improvement will be pursed in the main bank system to promote mutual development of banks and enterprises. Credit surveillance will be strengthened . Work will be dedicated to prevent and rectify behaviors aimed at slipping debt obligations to financial institutions.
II. Further speed up and deepen financial reform, and strengthen financial supervision and regulation. The state commercial banks will be urged to improve their management systems, streamline organizational structures and staff, and to improve services. Within this year, work will be completed in merging the sate commercial banks' provincial branches with their corresponding provincial capital branches. The five-category loan quality classification method will be applied on an overall basis. Assets management companies (AMCs) will be gradually set up and substantially reduce the proportion of NPLs. Trust and investment companies will be rectified. Their business scope will be standardized according to the principle of "manage others' money as entrusted" so that they can develop in a healthy way. Other commercial banks and urban and rural credit cooperatives will be assisted to develop steadily in the process of reform. Serious measures will be taken to find out, punish and rectify illegal financial activities such as unauthorized fund raising and establishing financial institutions and conducting financial businesses without due approval.
III. Continue to open the financial sector steadily, protect balance of the balance payments and the stability of Renminbi. Areas open for foreign banks to set up operational establishments will be expanded from the current 23 cities plus Hainan Province to all major cities. Further efforts will be made to improve the rules governing foreign banks conducting RMB business on a trial basis. Law enforcement will be strengthened in the area of foreign exchange administration. Legal instruments will be used to strike foreign exchange frauds in various forms. Illegal trading of foreign exchange will be strictly forbidden. Meanwhile, foreign exchange sales should be conducted timely and in a accordance with relevant rules and regulations in order to assist import and export business, and to support foreign investment.
Faced with the shocks of the Asian financial crisis, China has committed to non-devaluation of the RMB exchange rate. Now, the stability of the RMB exchange rate still has a firm ground. Devaluation of the RMB would hurt the interests of foreign investors, increase China's debt, and is not conducive to the stability of the Asian financial market. It is therefore not a helpful policy choice. At present, the level of China's foreign exchange reserves exceeds on year's total import payments, purchasing price for export products is stable, interest rate level is fairly low, and export refunds for some products has been increased. Analysis on the exchange rate formation mechanism also shows that RMB will not devaluate. We have full confidence of this.
IV. Improve the quality of PBC staff.
PBC staff are required to perform their duties in an honest and fair manner. No self-interest should interfere with the supervision and regulation work,. Strict requirement, management, surveillance, rewards and punishment will be pursued.