MONETARY POLICIES DURING THE NINTH 5-YEAR PLAN PERIOD IN RETROSPECT

From May 1996 to June 1999, the Central Bank has lowered its interest rate seven times. The one-year deposit interest rate decreased from 10.98% to 2.25%. The Bank of China's request for adjusting foreign saving deposit and loan interest rate were also approved, so as to coordinate the monetary policy of local currency with that of foreign currency, facilitate export recovery and maintain the stability of RMB exchange rate.

Faced with the growth of money supply brought about by the increase of forex reserve, the Central Bank decisively retrieved its large amount of loan granted to commercial banks.

The Central Bank utilizes various instruments to control money supply through purchasing forex, repo, and rediscount.

The Central Bank has gradually abandoned quantitative restrictions on the commercial bank's credit management, replaced the original instructive planning management with guiding planning management. The reserving rate has been lowered, the vitality of the commercial banks has been increased, and the floating range of interest rate for financial institutions to medium- and small-sized enterprises has been expanded.

The formation mechanism of the rediscount rate has been established. China's Central Bank began to independently publicize the rediscount rate, permitted the legal entity of insurance companies and commercial banks to implement the negotiable interest rate for deposits over 30 million RMB and five-year term, liberalized the loan rate of foreign currency and allowed financial institutions to make the decision according to market performance, liberalized the deposit rate for large amount of foreign currency, and realized the liberalization of interbank funding rate, repo rate, bonds trading rate, and the discount and re-discount rate (between financial institutions) of commercial papers.

In May 1998, the Central Bank resumed its open market operation, and began to orderly control the money supply with government bonds as its main instrument.

The Central Bank has issued a series of policies, including policies in support of enterprise reform and facilitating economic restructuring, improving financial service and supporting financial development, advocating financial service in some new fields and promoting domestic demand, bringing the practice in line with the trend of global finance, advocating and encouraging commercial banks to issue consumer credit so as to promote and advocate financial innovation.

In order to optimize the monetary policy environment and make the decisions scientifically, China has set up a Monetary Policy Committee, and rearranged the structure of organizations, thus increasing the independence for the implementation of monetary policy.

The Ninth 5 year period is the period when China's money market developed rapidly. The market came into being, and then gradually served as an important place for liquidity control and management for the Central Bank and commercial banks.

In January 1996, the People's Bank of China established a uniform national interbank funding market, and liberalized the funding rate in June of the same year. Commercial banks, their authorized branches, and some financial institutions such as city commercial banks could apply for the membership of the market.

After 1998, some securities companies and financial companies could apply to become a participant of the market. In 2000, the market volume amounted to 672.8 billion yuan. National bonds and policy financial debt were traded at the inter-bank bond market. Before June 1997, bonds were mainly traded in Shanghai and Shenzhen Stock Exchange, where repo and over speculation co-existed.

In June, the Central bank demanded that commercial banks retreat from the securities market completely, and set up the interbank bond market, issuing a series of policies to promote the development of the bond market.

With the rapid development of the bill market, the increase of discount volume accounted for 30% of the credit increase amount of the financial institutions by the end of 2000.

The Central Bank emphasized a development mode that includes leading fiscal policies and related monetary policies to adjust to the national economy. Correspondent monetary policies should be issued to match the fiscal policies. The central bank should play the active role of the "last lender", so as to strengthen the credit support to the medium- and small-sized financial institutions such as the city commercial banks and urban credit co-operatives.

(by Cheng Jiansheng)