Ensure Chinese economy "circulates smoothly"

16:25, September 24, 2009

Over the past 60 years, significant achievements have been made in terms of financial support for economic development. The financial industry has enormously increased its strength, comprehensively enhanced its capacity to service the public and continued to raise its voice in the international financial affairs.

"Do not make money of the public depreciate"

In China's economic arena this year, with the appropriate launch of a moderately relaxed monetary policy, China's every move attracts the attention of the rest of the world.

"Since September last year, the People's Bank of China (PBC) has cut interest rates five times and lowered the deposit reserve ratio four times. Since the start of this year, the rapid increase in lending has played an important role in economic stabilization and recovery," said Zhou Xiaochuan, governor of the PBC.

Zhou said frankly that the moderately relaxed monetary policy is facing challenges:

- Each monetary policy tool has its strengths and weaknesses, so selecting an appropriate tool demands serious consideration.

- A monetary policy has a delayed effect. "The effect of some policies will not emerge for three months, six months or even one year. The current formulation of policies can only be guided by predicted results, so it is necessary to use extensive historical data to make calculations and predictions. However, there is hardly any historical data available for coping with the international financial crisis."

- "Formulating and implementing monetary policies should involve particular attention to the transmission mechanism," explained Zhou, "A monetary policy will have varied effectiveness in two different countries or periods. For example, some western countries adopted fairly relaxed monetary policies, but banks there were reluctant to extend loans. As a result, these relaxed monetary policies were not implemented or were less effective after being implemented."

A moderately relaxed monetary policy is the epitome of financial support for economic development. Over the past 60 years and in particular the 30 years of reform and opening-up, the financial industry has played a core role in the modern economy and striven to ensure that China's economy "circulates smoothly".

Zhou's well-known phase "Do not make money of the public depreciate,” reflects the PBC's key function of keeping currency stable. "Keeping currency stable does not mean not changing currency value. Generally speaking, developed countries often aim for around two percent inflation. This means that prices increase by around two percent every year and interest rates should accordingly be above 2 percent. Developing countries with special national situations generally set a higher inflation target than developed countries."

Since the founding of New China, the PBC has promulgated the use of monetary policies to successfully control inflation and maintain the stability of currency value several times, playing a significant role in fueling economic growth.
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