Wang Zhao

I. With the matured timing for financial policy adjustment, the monetary policy should coordinate positively

Prudent monetary policy should remain to be the keynote of 2004. To make it more specific, the monetary policy should give priority to interest rate adjustment and open market operation. The use of deposit reserve should be avoided or practiced cautiously to avoid sharp rise and fall of the economy. At the same time, in order to maintain a moderate inflation level, the M2 supply should be controlled within a growth section of 17-19% while the growth of loans should be controlled within 21%.

II. The monetary policy should lay stress on promoting balanced development of consumption and investment

China’s entry into heavy industry period is not a short-term effect. Therefore, the monetary policy in 2004 should pay attention to guiding balanced development of investment and consumption. Prevention should be the main measure complemented by harnessing in the treatment of the overheated investment in certain industries. At the same time, structural credit policy should be adopted to stimulate the growth of consumption. On one hand, we should continue to give preferential treatment to the consumer credit in fields such as housing decoration, private cars and household appliances. On the other hand, we should implement a more relaxed consumer credit policy and positively foster the virtuous consumption psychology and consumption behavior of people in rural areas and poverty-stricken areas in the central and western China.

III. Speed up the reform towards market-oriented interest rate and relax the control on foreign exchange

Currently, the interest rate market-oriented reform only involves loans, the control on deposit rate is still rather strict. Therefore, in the year of 2004, the central bank shall make a realistic step forward in the process of rate liberalization.

In view of exchange rate, seen from the long-term development direction of China’s exchange rate reform, it is impossible to maintain the present exchange rate unchanged forever. We should select a time of stable macro economy and small probability of external speculation to boost the reform of RMB exchange rate.

Seen from the situation of 2004, the urgent affairs currently is to loose foreign exchange control and store exchange among the people and enterprises. Firstly, we should formulate related policies and regulations to initiate Qualified Domestic Institutional Investors and implement the strategy of “going out”. Secondly, we should reform the present system of foreign exchange settlement and sales and change the compulsory system of settlement and sales into a proportional one. At the same time, we shall continue to relax the limitation on the amount of foreign exchange taken by Chinese citizen when exiting by a large margin.

IV. Reform on China’s banking sector has entered an all-round trouble-shooting period

In 2004, the Chinese government decided to input US$45 billion foreign exchange reserve to supplement capital fund for the Bank of China (BOC) and China Construction Bank (CCB) and conduct shareholding system pilot. Therefore, BOC and CCB should take effort to strengthen internal reform, change the operation mechanism, establish sound corporate governance, upgrade the profit-earning ability and strengthen shareholder-rewarding awareness.

For small and medium-sized banks, it should be put on the agenda to relax financial control beginning with the participation of private capital for small and medium-sized banks and to gradually develop to establish private bank pilots and finally establish private banks.

V. Deposit insurance system should be established at the earliest possible time

Since 2004, China’s financial reform is accelerated: the liberalization of interest rate and exchange rate progresses gradually, big commercial banks will be listed after restructuring, the reform on small and medium-sized banks is also inevitable. The advance of the reform will inevitably lead to financial risks. Therefore, the deposit insurance system should be established at the earliest possible time. But the design of China’s deposit insurance institution should reflect the principle of “compulsory participation, fee linkage and risk sharing”.

March 2004

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