Money supply growth down moderately
By Xu binlan (China Daily)
Updated: 2004-11-12 00:40

China's money supply growth slowed moderately in October, but a major price index accelerated, government figures released Thursday show.

The different trends of the figures' development reflect the complex economic situation the country faces.

The People's Bank of China said M2, the broad measurement of money supply, grew an annual 13.5 per cent at the end of October, compared to 13.9 per cent at the end of September.

The slow-down can been seen as less economic activeness, a result policy makers desire. Money supply growth is mainly triggered by corporate activities.

But producer prices, whose changes will eventually be passed on to consumers, climbed more rapidly last month than they did in September.

The National Bureau of Statistics said producer price index (PPI) rose an annual 8.4 per cent during the year through October, compared to the 7.9 per cent registered during the January-September period.

Economists said it generally takes two months for PPI's influence on consumer prices, the key barometer for inflation, to show up.

It is believed that the simmering consumer price index (CPI), which hovered around 5 per cent for months, prompted the central bank to raise interest rates last month in an attempt to cool the economy.

But money supply is also a very important gauge for the central bank in observing the economy.

However, some analysts said the slow-down of money supply growth may not necessarily mean a muted investment growth, because lots of business people have been obtaining funds outside the official banking system.

So the conflicting figures of price and money supply growth will make officials look for more indicators before deciding their next move.

In another development, the central bank said it will unify the required reserve rates for Chinese and overseas banks drawing deposits in foreign exchange, to streamline the administration of such reserves and give national treatment to foreign banks.

From January 15, 2005, all the banks that operate foreign currency deposit services will be subject to the 3 per cent required reserve rate, the People's Bank of China said in a statement.

The rate for domestic banks is currently 2 per cent. For foreign banks, it is 3 per cent for deposits with maturity of three or more months, but it is 5 per cent for deposits with terms less than three months.

The unification of the rates means that foreign banks will operate on the same footing as their Chinese counterparts in this regard.

Financial institutions are required to place with the central bank a set proportion of the deposits they attract from corporate and private depositors. That portion of money is called required reserve.

The reserve is a means of security.

The central bank can also use the adjustments of the reserve rate to influence the amount of money that commercial financial institutions can lend.

The new rate means less money available for the Chinese banks to lend, which is in line with the central bank's current policy to control the growth of credits.

To cool the economy, the central bank has, since last year, raised the required reserve rate several times for bank renminbi deposits. The rates are now between 7 per cent and 8 per cent for different types of banks.

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