REVIEW OF FINANCIAL PERFORMANCE IN JULY 2004

Financial performance

According to preliminary statistics, broad money (M2) reached 23.8 trillion yuan at the end of July, with a year-on-year increase of 15.3 per cent, 0.9 percentage points lower than in June. Narrow money (M1) reached 8.8 trillion yuan, up 15 per cent year-on-year, 1.2 percentage points lower than the previous month. The base money stood at 5.1 trillion yuan at the end of July, up 15.7 per cent year-on-year, and 3.5 percentage points lower than the month before. In July, base money was 80.3 billion yuan less than the previous month.

At the end of July, outstanding loans denominated in both local and foreign currencies in all financial institutions was 18.1 trillion yuan. On a comparable basis, loans at the end of July increased by 15.9 per cent year-on-year, 0.8 percentage points lower than the previous month. Adjusted by verification this month, the real incremental loans was 26.5 billion yuan, 79.3 billion yuan lower than the same period last year. In general, the rise in loans has dropped off quickly.

At the end of July, deposits denominated in both local and foreign currencies in all financial institutions reached 23 trillion yuan, up 17.7 per cent year-on-year. Among that, household deposits stood at 11.4 trillion yuan, with a year-on-year rise of 15.9 per cent. The rise has now dropped for six consecutive months.

In July, the interbank RMB market traded 1.1309 trillion yuan, 74 billion yuan less than last month. The average daily turnover was 51.4 billion yuan, down 6.1 per cent from the figure a month ago. Market interest rate was basically stable.

Brief Analysis

The considerable drop in credit growth in July lay primarily in the increase of fiscal deposits and commercial banks' effective control on credit loans. The net injection of base money reached 45.1 billion yuan, and fiscal deposits increased by 125.4 billion yuan, thus the effective withdrawal of 80.3 billion yuan. Furthermore, with the implementation of macro adjustment by the central government, commercial banks have rectified their policies concerning credit loans.

The central bank should stick to the adjusting target for the whole year. In the first half of this year, planned investment for construction projects nationwide was 10.2 trillion yuan, up 34.4 per cent year-on-year; and the total investment for new construction projects was 2.4 trillion yuan, with a year-on-year rise of 30.8 per cent. The two rises are both higher than that of fixed asset investment in the first half of the year. Even the maintenance of projects under construction requires a large amount of middle and long-term loans from commercial banks. There still exists the pressure of a rapid increase in medium and long term loans.

In general, the adjustment of credit loans in the second quarter of this year has had demonstratable effects. The proportion of new loans for real estate and manufacturing against the total of newly granted loans has dropped. As for industries encouraged by the national industrial policy, new loans account for a larger proportion of the grand total. Such industries include electricity, gas, production and distribution of water, water conservancy, environment, and public facilities management.

Generally, enterprises operate smoothly in terms of funds. According to statistics from the Financial Survey and Statistic Department of the PBC that monitor 5,000 enterprises, the rise of enterprises' monetary funds stood at 28.3 percent at the end June, a record high since last year with an increase of 10.3 percentage points from the year-ago figure. The medium- and large-size enterprises remained stable in their ability to pay with the liquidity ratio of 104%. The small-size enterprises felt pressure in liquidity with the liquidity ratio of only 78% at the end of June, which is the same year-on-year.

There are a few major reasons for the slowing rise in household deposits this year. The real interest rate for household savings has been negative since last October, which therefore increases the proportion of residents' money invested in stocks, funds, bonds and insurance. Furthermore, enterprises' borrowing and unofficial lending has tended to be active; rising real estate prices has increased household investment; and people have raised their consumption expenditure. All of these factors have, to a different extent, drawn a portion of household savings.

Finally, financial institutions must pay close attention to the risks in the declining quality of loans as well as mismatching maturities between asset and liabilities.