REVIEW OF FINANCIAL PERFORMANCE IN DECEMBER 2004

Financial performance in December

The growth of money supply (M2) rebounded. At the end of December, broad money (M2) reached 25.32 trillion yuan, increasing by 14.6 percent year-on-year, down 5 percentage points from a year earlier. Narrow money (M1) rose by 13.6 percent year-on-year to 9.6 trillion yuan, 5.1 percentage points lower than the figure a year ago. Cash in circulation (M0) reached 2.15 trillion yuan, increasing year-on-year by 8.7 percent, 5.6 percentage points lower from a year earlier.

The net injection of base money reached 487.4 billion yuan in December, and the money multiplier decreased. At the end of December, base money had a balance of 5.89 trillion yuan, up 12.6 percent year-on-year. The M2 multiplier was 4.3, basically the same as the level a year before. The excessive reserve ratio for all the financial institutions was 5.25 percent, indicating a noticeable rise in financial institution liquidity.

Incremental RMB loans amounted to 2.26 trillion yuan in 2004. In end-December, outstanding loans denominated in both local and foreign currencies in all financial institutions increased to 18.86 trillion yuan. Outstanding RMB loans increased by 14.5 percent year-on-year to 17.74 trillion yuan, while outstanding FX loans increased by 12.5 percent year-on-year to US$135.3 billion.

At the end of December, outstanding medium and long-term loans totaled 7.03 trillion yuan, up 25 percent year-on-year; short term loans and bills financing had a balance of 9.84 trillion yuan, up 8.6 percent year-on-year. The year-on-year rise of medium and long-term loans exceeded that of short term loans and bills financing by 16.4 percentage points, 1.4 percentage points lower than the figure at the end of November.

Outstanding deposits denominated in both local and foreign currencies in all financial institutions (including foreign-funded ones) reached 25.32 trillion yuan at the end of December, increasing by 15.3 percent year-on-year. RMB household savings deposits increased by 15.4 percent to 11.96 trillion yuan. Affected by the rise in the real interest rate, household savings deposits growth continued to increase year-on-year. In December, household savings deposits increased by 193.7 billion yuan, up 55.5 billion yuan year-on-year, among which time deposits expanded by 99.2 billion yuan, up 56.2 billion yuan year-on-year.

In 2004, RMB transactions shrank markedly in the national interbank market, and the market interest rate was basically stable. The interbank market concluded 13.40 trillion yuan worth of RMB transactions, decreasing by 22.2 percent, or 3.82 trillion yuan year-on-year. The interest rate was basically stable, except a hike in January due to the Spring Festival factor, and another in April as a result of the adjustment of the legal reserve requirement ratio and anticipation of a market rate increase.

Review of financial performance 2004

Credit loans continued to increase at a moderate pace, effectively reigning in lending. After excessively high numbers in the first quarter, credit loan growth was reigned in by macro adjustment after April, reaching a yearly low in July and August before rebounding steadily after September. In general, financial performance was healthy and stable; credit loans grew moderately in 2004, in line with the growth of the economy and the CPI.

In an effort to improve credit loan structure, in macro adjustment the central bank stuck to the principle of "differentiated treatment, ensuring support to certain sectors while controlling the expansion of others". In terms of loan maturity, the momentum of rapid growth of medium and long term loans was checked, thus contributing to the effective controls on excessive growth and rebound of fixed asset investment. Non state-owned enterprises took a larger-than-ever proportion of loans, while more loans went to small and medium-sized enterprises. In light of loan subject, loans from financial institutions effectively promoted consumption demand.

Brief Analysis

The interest rate lift in 2004 checked the falling real interest rates in deposits and loans. The move by the central bank to use interest rate leverage helped direct investment anticipation, while lifting the loan interest rate ceiling contributed to the functioning of interest rates in fund allocation. Commercial banks will need to attach great importance to loan pricing, in order to effectively cover risk premiums.

Since 2004, inventory has increased in some enterprises and debts between enterprises have piled up. However, according to indexes such as outstanding deposits and new deposits, the current level of liquidity in enterprise is still acceptable, except for some problems in structure.

In 2004, indirect financing in China accounted for 94 percent, down 1.2 percentage points year-on-year, and direct financing accounted for 6 percent, up 1.2 percentage points year-on-year. It will benefit effective allocation of resources and financial risk management to increase the proportion of direct financing.