(Monetary Policy Analysis Group of the People's Bank of China)
Executive Summary
The first quarter of 2003 witnessed good economic performance in China. GDP growth rate of Q1 escalated by 2.3 percentage points over Q1 2002 to 9.9 percent. Investment continued to drive the economy on the track of robust expansion and general price level further rallied. The agriculture and rural economy maintained steady development with the agricultural structure further optimised. Industry maintained rapid growth with economic returns continuing to rise.
In the first quarter of 2003, the growth of money and credit accelerated, a trend basically commensurate to economic growth. At the end of March, broad money M2 reached RMB19.4 trillion yuan, up 18.5 percent over a year earlier. Narrow money M1 was RMB7.1 trillion yuan, up 20.1 percent over a year earlier. In the first quarter, loans by financial institutions including foreign ones in both local and foreign currencies rose by RMB851.3 billion yuan, accelerating by RMB502.2 billion yuan. Deposits of financial institutions grew significantly while household savings deposits continued to growth rapidly. Deposits of financial institutions in local and foreign currencies grew by 19.1 percent to RMB10.2 trillion yuan over a year earlier. At the end of March, the base money of the PBC reached RMB4.39 trillion yuan and the year-on-year growth rate decelerated to 6.9 percent. The average excess reserve ratio of financial institutions was 5.12 percent, indicating adequate liquidity in financial market. The interest rate remained stable in general. In the first quarter, the interest rates on deposits with free float rate of commercial banks (with maturity over five years and exceeding RMB30 million yuan) ranged from 3.1 percent to 3.3 percent. In the first quarter, interest rate in inter-bank market slid gradually and the repo rate declined slightly, also indicating adequate liquidity in the market. The monthly weighted average inter-bank lending rate was 2.16 percent, 2.13 percent and 2.06 percent respectively for the first three months and the monthly weighted average repo rate was 2.28, 2.25 and 2.04 percent respectively. The balance of payments remained strong. The official foreign exchange reserves grew by USD29.6 billion in the first quarter to USD316 billion. The renminbi exchange rate remained broadly stable comparing with the end of last year, being at one RMB8.2771 yuan per US dollar.
Supported by a number of favorable factors, the Chinese economy is likely to maintain its rapid growth momentum in 2003. However, the sudden outbreak of SARS has posed a stern challenge to the Chinese economy, particularly to such sectors as tourism and consumption. Even so, under the strong leadership of the central government, the Chinese people are fully confident of minimizing its negative impact.
The 7 percent growth target envisaged at the first plenary session of the 10th NPC is still attainable. CPI is projected to grow by 1-2%, M2 by nearly 18% and RMB loans of all Chinese financial institutions by 2 trillion yuan.
Monetary policy during the next stage will be: First, to continue the sound monetary policy and ensure a steady growth of credit. Second, to maintain basic stability of the interest and exchange rate policies and to advance steadily the market-based interest rate reform. Third, to improve financial services to support economic restructuring. Fourth, to further develop money market to improve allocation of financial resources. Fifth, to strengthen credit support for SARS prevention. The most important is that commercial banks must ensure credit support for the production and procurement of materials necessary for SARS prevention, such as medicines, and for the production and procurement of materials key to normal functioning of the country's economy and life of the people during the SARS fighting period, such as the daily necessities and agricultural produce. Meanwhile, market surveillance should be improved to prevent financial risks. Six, to improve financial services along with SARS prevention. The PBC branch offices should ensure adequate cash supply and improve the hygienic condition of cash in circulation. Banknotes and coins withdrawn from circulation should be disinfected. Effective measures should be taken to protect operation of the electronic fund transfer and payment systems as well as the intra-city bill exchange houses from disruption and to ensure timely fund-clearing between customers and commercial banks.
Part One Monetary and Credit Performance
The first quarter of 2003 witnessed good economic performance in China. The People's Bank of China (PBC) continued the sound monetary policy in line with principles stipulated by the Economic Working Conference of the Central Committee of the Party, the People's Congress as well as the People's Political Consultative Conference, resulting in the accelerated growth of monetary and credit aggregates. The growth of money and credits was basically commensurate to the needs of economic growth.
I. Acceleration of the growth of money supply
At the end of March 2003, the broad money (M2) reached RMB19.4 trillion yuan, growing by 18.5 percent over a year earlier. Narrow money M1 was RMB7.1 trillion yuan, with a growth rate of 20.1 percent over a year earlier. The growth rates of M2 and M1, 1.7 and 3.3 percentage points higher than those at the end of 2002 respectively, were five and 4.7 percentage points higher than the average growth of the corresponding period during last three years. The growth of M2 was 8.1 percentage points higher than the sum of GDP growth (9.9 percent) and CPI increase (0.5 percent) during the same period. Cash in circulation M0 amounted to RMB1.7 trillion yuan at the end of March, increasing by 10.1 percent over a year earlier. The net withdrawal of cash in the first quarter totalled RMB17.2 billion yuan, up RMB2.7 billion yuan over the corresponding period of last year, indicating the stable situation of the circulation of cash.
Figure 1 The Gap Between M2 Growth Rate and the Sum of GDP Growth and CPI Increase Since 1997
Source: PBC Monthly Credit Bulletin and China Statistical Yearbook.
II. Marked increase of loans by financial institutions
In the first quarter, loans by all financial institutions including foreign ones in both renminbi and foreign currency increased by RMB851.3 billion yuan, with an acceleration of RMB502.2 billion yuan. The renminbi loans grew by RMB808.2 billion yuan, representing an acceleration of RMB475.8 billion yuan. Foreign exchange loans rose by USD5.2 billion, accelerating by USD3.2 billion. The increase of renminbi loans by financial institutions in the first quarter was RMB506.4 billion yuan higher than the average growth of the corresponding period during last three years.
Loans by the wholly state-owned commercial banks increased by RMB499.6 billion yuan, accelerating by RMB356.2 billon yuan over the corresponding period of last year. Loans by policy banks rose by RMB18.9 billion yuan, basically by the same margin of last year. Loans by joint stock commercial banks grew by RMB135.2 billion yuan, with an acceleration of RMB24.6 billion yuan. Loans by rural credit cooperatives (RCCs) increased by RMB122.5 billion yuan, accelerating by RMB39 billion yuan.
In the first quarter, the increase of discounts of commercial papers, the infrastructure and technology innovation loans, consumer loans, agricultural loans as well as short-term industrial loans reached RMB526.8 billion yuan, accounting for 65.2 percent of the new renminbi loans by all financial institutions. The extension of loans was basically commensurate with the needs of credit policy.
III. Significant growth of the deposits of financial institutions and rapid increase of household deposits
In the first quarter, deposits of financial institutions both in renminbi and foreign currency increased by RMB1.1261 trillion yuan, representing an acceleration of RMB718.2 billion yuan over a year earlier. The renminbi deposits rose by RMB1.1416 trillion yuan, with an acceleration of RMB744.3 billion yuan. Deposits in foreign currency declined by USD1.9 billion (compared with the increase of USD1.3 billion in the first quarter of 2002).
The growth of corporate deposits both in renminbi and foreign currency in the first quarter was RMB151 billion yuan, representing an acceleration of RMB273 billion yuan if compared with the decline of RMB122 billion yuan in the first quarter of 2002. The corporate renminbi deposits increased by RMB171.8 billion yuan, accelerating by RMB288.3 billion yuan (compared with the decline of RMB116.5 billion yuan over the corresponding period of last year). At the end of March, the corporate deposits in renminbi and foreign currency reached RMB6.6 trillion yuan, growing by 23.2 percent over the corresponding period of last year.
Household savings deposits deposits of financial institutions rose by RMB764.2 billion yuan in the first quarter, accelerating by RMB239.7 billion yuan. The household savings deposits in renminbi increased by RMB758.2 billion yuan, with an acceleration of RMB253.1 billion yuan. Since the beginning of 2001, the growth of household savings deposits has been around 18 percent. At the end of March 2003, the household savings deposits of financial institutions both in renmibi and foreign currency reached RMB10.2 trillion yuan, growing by 19.1 percent over the corresponding period of last year.
Box 1 Implication of the Rapid Growth of Household Deposits
Since the unfolding of economic reform, the growth of household deposits has outpaced economic growth and the increase of household income. During the 24 years from 1978 to 2002, the annual average growth of household savings deposits reached 28.5 percent, or 23.2 percent if considering inflation factor, while the annual real GDP growth rate reached 9.4 percent, and the annual net income per capita in rural areas as well as the annual disposable income in urban areas in real terms grew 7.18 percent and 6.68 percent respectively.
While the steady increase of household income is the basic determinant of the rapid growth of household savings deposits and the limited investment opportunities as one important contributing factor, the rising propensity to savings due to increasing uncertainties on future income and spending against the background of the full-pledged deepening of economic and financial reform also contributed to the rapid growth of household deposits. A survey carried by the PBC in the first quarter of 2003 showed that under the current level of price and interest rate, 34.1 percent of depositors think "it is more economic to save more", indicating a 7.3 percentage points increase over a year earlier.
The rapid growth of household deposits has largely supported the rapid economic growth in China during last two decades and is also a reflection of public confidence in the Chinese financial system. At the same time, the growth of investment and the investment ratio remained high. Especially before the transition of the Chinese economy from quantitative growth to qualitative growth, large scale of fixed assets investments played an important role in economic growth. Since 1998, while loans increased rapidly, commercial banks used part of savings deposits to purchase government debts and financial bonds issued by policy banks to support the implementation of active fiscal policy and other stimulus policies and sustain strong growth of Chinese economy.
The stable growth of household savings deposits has also contributed to the development of the banking sector. Since mid 1990s, the share of household savings deposits in funding sources and in deposits of financial institutions has been above 45 percent and 50 percent. The stability of savings, while ensuring the normal operation and payment capacity of the banking system, has played significant roles in maintaining social stability and financial security.
However, the rapid growth of savings deposits has constrained final consumption to some extent and imposed the pressure and risks on the operation of banking system. In contrast with the rapid growth of deposits, the average propensity to consumption of households has been declining for a long period of time. Up to 2001, the average propensity to consumption of urban households has been 77.4 percent and 73.6 percent in rural areas (Figure 2). The drop of propensity to consumption has partly offset the drag on economic growth by investment expansion and has affected the final consumption.
Figure 2 The Average Propensity to consumption of Households
Notes: The average propensity to consumption of urban households=the consumption expenditure per capita in urban areas/average annual disposable income per capita in urban areas. Propensity to consumption of rural households=consumption expenditure per capita in rural areas/ average annual net income per capital in rural areas.
Source: China Statistical Yearbook.
The rapid growth of household savings deposits has caused high risk concentration of banks, which has produced some negative impact on the healthy and stable development of the financial system, and even on the economy. In terms of flow of funds, the ratio of indirect financing in 2001 was 78 percent and even higher in terms of stock of funds. As for financial institutions, funds became more concentrated in the four wholly state-owned commercial banks. At the end of 2002, 65 percent of household deposits was concentrated in the four wholly state-owned commercial banks. In the longer term, the increasing repayments of principals and interests on household savings deposits will be a "hard constraint" to the financial condition of commercial banks as a fairly large part of banking assets are non-performing, which has intensified financial risks facing commercial banks.
In the future, China will further develop the direct financing and increase investment opportunities to diverse household savings deposits while encouraging consumption through the adjustment of consumption policies to stimulate economic growth.
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IV. Moderation of the growth of base money and adequate liquidity of financial institutions
The balance of base money of the PBC at the end of March reached RMB4.39 trillion yuan, up 6.9 percent over a year earlier and representing a deceleration of five percentage points from 2002. The average excess reserve ratio of financial institutions was 5.12 percent, among which, 5.22 percent for the wholly state-owned commercial banks, 5.45 percent for joint stock commercial banks, 4.71 percent for RCCs and 2.3 percent for city commercial banks. In recent years, the share of bonds in total assets of financial institutions tended to rise and the money market witnessed rapid development. At the end of March, securities held by financial institutions both in local and foreign currency reached RMB3.4 trillion yuan, accounting for 18.8 percent of total financial assets and 23.1 percent of loans by financial institutions. Since this part of assets can be easily converted into cash, the excess reserves of financial institutions declined. Therefore, at present, the liquidity of financial institutions, especially the wholly state-owned commercial banks is adequate.
V. Stable interest rate
In the first quarter, the interest rates on deposits with free float rate of commercial banks (deposits with a maturity over five years and exceeding RMB30 million yuan) ranged from 3.1 percent to 3.3 percent, with the highest of 3.4 percent, comparing with the 3.3 percent to 3.6 percent and the highest of 4.5 percent over the corresponding period of last year. The floating of rates on loans was reasonable. A survey on 14 national commercial banks showed that the interest rates of 57 percent of loans was lower than or equivalent of the benchmark while 43 percent was higher. (Table 1)
Figure 3 The Change of Growth of Base Money and Excess Reserve Ratio of Financial Institutions Since 1998
Sources: PBC Monthly Credit Bulletin
The change of interest rates on foreign currency deposits diversi
