Xia Bin, Gao Shanwen and Chen Daofu

I. Reason for the DrasticChanges of Current Credit Situation

The balance of loans of all financial institutions stood at RMB 1,589 billion as of the end of June 2003, up 22.9 per cent year-on-year. M2 money supply amounted to RMB 2,049 billion, up 20.8 percent year-on-year. The two data are record high respectively since 1996 and August 1997. Will the rapid growth of monetary and loans bring about new overheated economy? How to deal with the relationship between monetary policy and exchange policy? To answer these questions, first we must analyze and judge reasons why credit soared in the first half of the year.

1. The normal rapid growth of national economy vigorously stimulated the requirement for loans.

GDP grew by 9.9 percent in the first quarter of 2003. SARS which broke out and spread in April and May had some negative impact on China’s national economy in a short period of time, but it did not have remarkable impact on the growth of the whole economy or the economy of the whole 2003. The loss for domestic consumption in some sectors affected by SARS epidemic will be compensated in the second half of the year. The economy has maintained the development momentum on investment growth due to system reform, especially the rapid development of the private economy. In the first five months, investment in fixed assets was increased by 31.7 percent, hitting a record high. The total value of import and export grew by nearly 40 percent in the five months. These were the basic factors promoting the rapid growth of loans in the first half of 2003.

2. The momentum of investment was accelerated after the newly elected local governments at various levels took office.

It was proved by the relevant data that since the second half of 2002 loan expansion and investment in fixed assets have been accelerated, especially investment in infrastructure, such as airports, subways, roads, bridges, telecommunications, electric power, etc. The acceleration was basically in line with the reelection of local governments at various levels. Departments affected by investment were related to the behavior of local governments at various levels. "Five types of small enterprises" (including small coal mine, paper-making, cement, textile and chemical fertilizer factories) which had been closed down were brought back into operation again. In some regions, the industrial structure of newly-established enterprises are basically the same while repetition in construction occurs, which promoted the rapid growth of loans.

3. The slowdown of international economy, the downward trend of interest rate, and the anticipation of renminbi's appreciation brought about the inflow of a large amount of capital.

Since 1994, the error account of China’s balance of international payments has maintained huge minus values for a long period of time. In 1999 the error account even reached about US$15 billion. But in 2002 the error account turned into a huge positive value for the first time, amounting to about US$ 8 billion. It was impossible that such a remarkable reverse was achieved by intensifying the management of foreign exchange. Meanwhile the settlement of exchange of exporters has climbed to a level much higher than that of the average in history. The obvious backflow of foreign net assets has appeared in financial institutions, and foreign direct investment also has hit a record high. All these factors showed that foreign capital in various forms has entered China by various ways, which have promoted China’s economic expansion.

4. Commercial banks’ new ways in providing loans have facilitated the rapid increase of loans.

While commercial banks undergo the reasonable change of business concepts and intensify marketing management, the following new situation occurs:

First, under the pressure of reducing the rate of non-performance loans, some grass-roots branches of four state-owned banks (referred to the Industrial and Commercial Bank of China, Bank of China, Agricultural Bank of China, and China Construction Bank) are silently changing their strategies. They reduce the rate of non-performance loans through the acceleration of granting of loans which mainly are long-term loans with governmental background or guaranteed by governments. Grass-roots branches do not worry about the risk of granting loans.

Second, four large banks had misgivings in providing loans to small and medium-sized enterprises (SMEs) in the past. As for loans to SMEs and small-scale project loans, with the development of bill market, a large number of small and medium-sized banks first discount accepted bills. Then four large banks rediscount these bills for small and medium-sized banks. Small and medium-sized banks first bear loan risks and reduce the worries of four large banks about loan risks, which therefore result in the rapid development of bill market. In 2002, the discounting value of commercial bills amounted to RMB 2,307.3 billion, up 61 percent year-on-year. In the first four months of 2003, the value of bills for discount was increased by RMB 182.5 billion, accounting for 17.1 percent of the increased loans provided by financial institutions in the period. The outstanding value of bills for discount amounted to RMB 759.4 billion, hitting a record high. The Industrial and Commercial Bank of China recorded newly-increased loans of RMB 178.126 billion in the first quarter of 2002, of which loans of bill discount amounted to RMB 78.914 billion, accounting for 44.3 percent.

Third, the emergence of loan resale market and other financial innovations accelerated the turnover of loans.

Fourth, some banks took some measures inside banks, such as authorizing more privileges to grass-roots branches, downgrading the reserve ration of subordinate branches within banking system and encouraging grass-roots branches to provide loans initiatively and in a reliable way.

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