REVIEW OF FINANCIAL PERFORMANCE IN AUGUST 2004

Financial performance

Broad money (M2) growth slowed down moderately. The balance of M2 reached 23.97 trillion yuan at the end of August, with a year-on-year increase of 13.6 percent, 1.7 percentage points lower month-on-month. Narrow money (M1) reached 8.91 trillion yuan, up 15.1 percent year-on-year, almost the same as the previous month. Adjusted for seasonal factors, the annualized month-on-month increase of M2 stood at 6.5 percent at the end of August, the same rate as the previous month.

Money in circulation (M0) reached 1.95 trillion yuan at the end of August. In August, 10.9 billion yuan was put into circulation, down 13.6 billion yuan year-on-year.

Loan growth leveled off slightly. At the end of August, outstanding loans denominated in both RMB and foreign currencies in all financial institutions (including foreign-funded ones) was 18.22 trillion yuan, up 14.5 percent year-on-year, a rise 1.4 percentage points lower than the month-ago figure. Outstanding RMB loans arrived at 17.1 trillion yuan, up 14.1 percent year-on-year, 1.4 percentage points lower from one month before. After seasonal adjustment, the annualized month-on-month rise was 7.2 percent. Incremental loans in August were 115.7 billion yuan, down 165.1 billion yuan year-on-year.

The increase of all deposits in financial institutions slowed, and the increase of household savings deposits has dropped for seven consecutive months. At the end of August, deposits denominated in both RMB and foreign exchange in all financial institutions (including foreign-funded ones) was 24.53 trillion yuan, up 16.7 percent year-on-year, the increase being 4.2 percentage points lower than the year-ago figure.

At the end of August, the balance of RMB deposits was 23.25 trillion yuan, up 17.6 percent year-on-year. After seasonal adjustment, the annualized month-on-month increase was 12.5 percent, 2.6 percentage points lower than the previous month. Of that, RMB savings deposits reached 11.4 trillion yuan, with a year-on-year increase of 15.3 percent, 4.7 percentage points lower year-on-year and 0.6 percentage points lower month-on-month. The rate of increase has slowed for seven months in a row.

At the end of August, FX deposits stood at US$154.9 billion, up US$1.23 billion from the previous month, rising 780 million year-on-year.

In the interbank market, RMB trading volume decreased slightly and market interest rates remained stable. In August, the interbank RMB market traded 1.05 trillion yuan. The average daily turnover was 47.7 billion yuan, down 7.1 percent from the month-ago figure. The weighted average interest rate for interbank funding was 2.34 percent, inching up 0.01 percentage points from the previous month. The weighted average interest rate for repo was 2.31 percent, down 0.03 percentage points from the previous month.

Brief Analysis

Loan growth declined considerably in July and August, and fixed asset investment rebounded in July. The retreat of bank credit loans and the rebound of fixed asset investment made it difficult for monetary policy adjustment. It is expected that the current rebounding trend in fixed asset investment will pump up the loans of financial institutions in the next three months and the growth in medium and long-term loans is still at a high level. The central bank should pay close attention as to whether there are unhealthy factors in the fixed asset investment rebound. The central bank must stick to adjusting approaches of market economy, so as to conduct monetary policy adjustment in an active and safe manner through diversified adjusting methods. In the present key stage of macro adjustment, the bank must adhere to the objectives of money credit loans for the year.

The increase in the money supply was slow, although the central bank moderately put base money into circulation. The small increase of loans is primarily due to insufficient market demand and a lack of initiative on the part of commercial banks. The result is that the financial system's capacity for money creation has declined and the transmission effect of monetary policy dampened. Therefore, the central bank should strengthen its window guide for commercial banks and use different policies for different cases rather than universal control for all credit loans, so as to safeguard the transmission effect.

In August, the increase in fiscal deposits accounted for 66 percent of the base money withdrawn from circulation. Changes in fiscal deposits have a marked impact on base money injection. Fiscal deposits tend to rise from August to October each year and slump in December. The central bank, therefore, should keep an eye on the impact of changes in fiscal deposits on base money injection in the coming months.

The negative real interest rate of household savings deposits and diversified financial assets of residents continued to drag down the year-on-year increase of savings deposits, which had decreased for seven consecutive months.