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China plans prudent monetary policy for 2006
Updated: 2006-01-06 14:20

The People's Bank of China (PBC), China's central bank, disclosed Thursday the macro-control goals for its monetary policy in 2006.

The year-on-year growth of broad money M2 in 2006 will be 16 percent, the growth for narrow money M1 will be 14 percent and the increase of RMB loans will be 2500 billion yuan (US$308.6 billion), said the PBC.

The goals show the prudence of China's monetary policy in 2006, said Peng Xingyun, a financial expert at the Chinese Academy of Social Sciences.

The central bank aims to maintain stable growth of the macro-economy through its monetary measures, said Peng.

The working conference of the PBC held Thursday in Nanchang, capital of Jiangxi Province, said that to realize the goals for the monetary policy in 2006, the central bank will enhance monitoring of economic and financial operations and increase the effectivenss of the monetary policy.

The PBC will maintain a reasonable growth of loans by using a variety of monetary policy tools and advance the market-oriented interest rate forming mechanism, said the conference.

According to Peng, to guard against a possible deflation, the central bank set a higher growth goal of M1 in 2006 than the real growth rate in 2005.

Mainly composed of demand deposits, M1 is a major settlement tool for commodities, services and financial deals between enterprises.

So the growth of M1 directly reflects the activity of the economy, said Peng.

As the first 11 months of 2005 saw only a growth of 12.7 percent of M1, Peng said that there existed deflationary factors and it is necessary for the central bank to set a higher growth rate of M1 in 2006.

According to the goals set for the monetary policy in 2005, the growth of M1 and M2 were both 15 percent and the increase of RMB loans was 2500 billion yuan.

However, the real annual growth of M2 is expected to reach 17 percent in 2005, while that of M1 will be a little lower than the goal and the increase of RMB loans would be less than 2500 billion yuan.

As the major financing sources for the Chinese economy are banks, bank loans are an important index in examining the growth of the economy, said Peng.

According to him, although the increase goal of RMB loans set in 2006 is equal to that in 2005, the real growth will be lower as a result of a bigger base in 2005.

It shows that the central bank is not going to ease credit lest the economy gets overheating, said Peng.

At the conference, tasks were set for work of the central bank in 2006: maintaining the continuity and stability of the prudent monetary policy, advancing financial reform steadily, accelerating reforms of introducing the stockholding system to state-owned commercial banks, developing the financial market, safeguarding the stability of the financial system, improving management of foreign exchange, and enhancing financial services.

As for the exchange rate reform in 2006, the central bank said China will continue to improve the managed, floating exchange rate regime as it is needed for the economic and financial development and stability of the country.

Peng said that it is irreversible for the exchange rate regime to become market-oriented and more progress is expected in 2006.

But as pressures on revaluation of RMB is still high, Peng said that the central bank should find some more effective way to intervene in the foreign exchange market to prevent large fluctuations of the currency.

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