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Monetary Policy Needs Adjustment
The central People's Bank of China should focus on structural adjustment in its monetary policy, while continuing to increase money supply and adjusting the interest rate to back the country's economic development.

The implementation of a pro-active fiscal policy and a sound monetary policy has played an active role in easing falling prices and promoting economic development during the 1999-2002 period.

Consumer prices fell over the past four years by 1.4 percent, 0.4 percent, 0.7 percent and 0.8 percent, respectively.

Over the past four years, the country's gross domestic product grew by 7.1 percent, 8.0 percent, 7.3 percent and 8.0 percent, respectively.

Broader money supply or M2 increased by 14.7 percent, 12.3 percent, 14.4 percent and 16.8 percent, respectively, over the past four years.

However, the country still suffered an insufficient demand. The supply structure also could not meet market demand.

With the aim of eliminating the "bottleneck" in China's economic development, the central government has, since 1998, chosen to invest in road and other infrastructure projects to expand domestic demand.

For the same purpose, the central bank should give more attention to structural adjustment to eliminate the "bottleneck" in monetary policy.

The government should not merely rely on increasing money supply and adjusting the interest rate to back the country's economic development, because the monetary distribution mechanism is inefficient.

Monetary policy should devote attention to supporting the development of small and medium-sized companies.

Small and medium-sized companies received insufficient support from the State in obtaining loans, due to the lack of a social credit system and an adequate legal system.

State-owned commercial banks, which are concerned about loan risks, are reluctant to offer loans to these companies.

The country also did not have enough small and medium-sized banks, which are willing to offer loans for these companies.

The government could break up one or two State-owned banks and list them on the stock exchanges in order to improve these banks' corporate governance and to create more smaller banks.

Meanwhile, the government should encourage private investors and foreign investors to participate in small and medium-sized banks.

Today, banks with shareholders are more willing to offer loans for small and medium-sized companies.

The central bank should make a priority of giving support to these banks when issuing re-lending loans.

Since economic development between different areas in China varies, monetary policy should vary in the eastern, central and western areas.

More decision-making powers should be devolved to the nine major branches of the People's Bank of China.

Regional branches in the central and western areas should be allowed to offer lower interest loans, while branches in the eastern areas should be allowed to increase their interest rates for loans.

Monetary policy should also devote more key attention to rural areas.

Since June 1998, the four largest State-owned banks - China Construction Bank, the Bank of China, the Industrial and Commercial Bank of China and the Agricultural Bank of China - began to reduce the branches in areas below the county level. Those branches also have few rights to offer loans.

As a result, those branches only offer very basic functions.

The function of China Post Savings, established in 1986, was mainly focused on account holders' deposits, which were saved in the central bank.

The four State-owned banks and China Post Savings were not helping to revitalize the rural economy.

The central bank should take measures to stop the four State-owned banks from further reducing their services in rural areas.

The central bank should also take measures to ensure that savings deposited with China Post Savings are used to help support rural economic development.

Meanwhile, the central bank should try to solve the historical burdens of rural co-operatives to increase the loan capability of these institutions.

Due to the lack of financial means, "underground banks" have grown in rural areas.

Although these banks helped ease the problem of access to loans, they increased farmers' financial burdens and risks.

The central bank should allow private investors to participate in rural financial institutions to support rural economic development.

The sound development of rural co-operatives between 1983 and 1991 suggested farmers could operate financial institutions.

But their failure after 1992 was mainly because of local government intervention.

The author is a researcher with the Development Research Center under the State Council.

(China Daily April 7, 2003)

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