Niu Li, a senior economist with the State Information Center, said the implementation of the present steady monetary policy was mainly because of the worries that inflation might occur and the country's financial system be destabilized because of the large number of non-performing loans and the fierce competition from foreign banks following China's accession to the World Trade Organization.

But figures from the National Bureau of Statistics indicate that in December, the consumer price index (CPI), a key inflation gauge, dropped 0.3 percent compared with the figure for the same month of 2000.

The decrease follows a drop of 0.3 percent in November and a decline of 0.1 percent in September.

"This is a dangerous warning,'' Niu said. "If the situation continues, China could suffer from deflation.''

The monetary policy, whose effects are weaker than those of the country's pro-active fiscal policy in stimulating domestic demand, should play its role in backing economic development, said Hu Shaowei, another senior economist with the center.

"The efficiency of the monetary policy should also be improved through the reform of financial systems,'' Hu said.

Chinese commercial banks, especially State-owned banks, are reluctant to lend money to small and medium-sized companies, because of a possible increase of non-performing loans, he said.

But State-owned companies, which created large numbers of non-performing loans over the past number of years, always find a way to borrow money from those banks, he said.

"The country should also consider a further cut in the renminbi interest rate, although the impact would be very limited,'' Hu said.

He added the rate cut would at least send a positive signal to the country's sluggish stock markets.

Zhang Liqun, a senior researcher with the Development Research Center under the State Council, said an interest rate cut is likely, because the value of the renminbi is appreciating.

The appreciation could do further harm to China's exports growth, which have already decreased because of a slowdown in the global economy, he said.

Zhang said the government has pinned hopes on stimulating domestic demand -- fixed assets investment and consumption -- to boost the economy.

But Niu said Chinese urban consumers are unlikely expected to spend more, as people are now struggling with worries like pensions, medical care and education for their children.

As for investment, the policy factors played an important role, as investment greatly depends upon government injections, treasury bonds in particular, he said.

(China Daily January 22, 2002)