Finance

Financial performance remained sound and stable in May, according to the People's Bank of China (PBC), the central bank.

During the month, money supply grew rapidly (see graph 1). A total of 69 billion yuan of cash was withdrawn from circulation, 16.5 billion yuan less than that in the same period last year.

In May, loans still increased fast. At the end of April, the outstanding renminbi and foreign currency loans of all financial institutions totaled 22.43 trillion yuan, increasing 15.1 percent over a year ago, 2.7 percentage points higher than the rate in the year-earlier period (see graph 2). Among renminbi loan recipients, households and non-financial institutions got 14.4 percent and 16.3 percent more lending, respectively.

During this month, 209.4 billion yuan of renminbi loans were added to the balance, 100.5 billion yuan more than the figure in the same period last year. Of them, short-term loans and paper financing grew 66.3 billion yuan, 22.2 billion yuan more than in the same period last year, while medium- and long-term loans increased 136 billion yuan, 72.7 billion yuan more than in the year-earlier period.

In May, the increase of deposits from households slowed down. The month-end outstanding renminbi and foreign currency deposits of all financial institutions totaled 32.7 trillion yuan, growing 18.4 percent over the year-earlier period, 1.7 percentage points higher than the rate in the same period last year. Of the total, deposits from households and non-financial institutions rose 16.4 percent and 19.2 percent, respectively, year on year, 0.4 percentage points and 3.4 percentage points higher than the rates in the same period last year.

Of the renminbi deposits, households contributed 15.4 trillion yuan, expanding 17.6 percent from a year ago, dropping 0.4 percentage points from the beginning of 2006. This year, especially in May, stocks rallied rapidly and securities transactions grew fast, absorbing part of household deposits. In May, newly increased household deposits stood at 12.2 billion yuan, 63.8 billion yuan less than the figure in the same period last year, representing the slowest monthly growth since August 2001. As of the end of the month, renminbi deposits from non-financial institutions ranged up 15.7 percent to 10.13 trillion yuan, 2.2 percentage points higher than the same period last year.

In May, renminbi transactions in the inter-bank market amounted to 2.48 trillion yuan, or 137.7 billion yuan per day. It was 37 percent higher than the same period last year.

As of the end of May, the renminbi-U.S. dollar exchange rate stood at 8.0188 yuan, 23 basis points higher than that at the end of April. During this month, the renminbi-U.S. dollar exchange rate once fluctuated 168 basis points, the largest since the reform of the renminbi exchange rate in July 2005.

Corporate Commodity Prices

In May, corporate commodity prices monitored by the PBC inched up 0.6 percent over April and rose 1.5 percent over a year ago. Of the total, prices of primary products were up 0.7 percent over the previous month and increased 4.8 percent compared with the same period last year. Prices of intermediate products climbed 1.1 percent from April and 1.8 percent from a year ago, while those of final products dropped 0.2 percent from the previous month and were 0.2 percent lower than the year-earlier period.

During this month, prices of agricultural produce decreased 0.8 percent from the previous month but went up 0.8 percent from a year ago (see graph 3).

In May, prices of refined oil went up 4.4 percent compared with April and ranged up 26.8 percent from a year ago, while prices of natural gas gained 3.8 percent from the previous month and 15.8 percent from a year ago.

This month, pig iron prices increased 2.4 percent over the previous month and were 2.8 percent higher than the same period last year. Prices of rolled steel increased 2.6 percent over April but saw a decline of 9.1 percent compared with the same period last year.

Prices of natural rubber rose 7 percent from the previous month and shot up 52.1 percent over the same period last year, while those of synthetic rubber went up 1.6 percent since April and were 5.6 percent higher than the year-earlier period.

Prices of electric appliances inched up 0.3 percent both over a month ago and a year ago. Among the total, prices of air conditioners, refrigerators, washing machines and electric fans rose 0.3 percent, 0.7 percent, 0.1 percent and 0.1 percent, respectively, over April.

Foreign Direct Investment

From January to May, the Chinese Government approved the establishment of 15,659 foreign-invested enterprises, a decline of 4.73 percent year on year. The paid-in capital arrived at $22.99 billion, up 2.78 percent compared with the same period last year. In May alone, the paid-in capital decreased 7.86 percent year on year to $4.51 billion.

In the first five months, the 10 countries and regions that invested the most in China were Hong Kong, the British Virgin Islands, Japan, South Korea, Germany, the United States, Taiwan, Singapore, the Cayman Islands and Samoa. They contributed 84.08 percent of the total foreign investment that China absorbed.

Required Reserve Rate

The PBC will raise the required reserve rate of financial institutions at the central bank by 0.5 percentage points starting on July 5. This means that the required reserve rate for state-owned and joint-stock commercial banks will be increased from the current 7.5 percent to 8 percent. However, the current required reserve rate for rural credit cooperatives (including rural cooperative banks) will remain unchanged.

Central bank officials said that the move aims to further restrain the fast growth in lending this year and maintain a stable financial environment for the sustained and healthy development of the national economy.

According to the PBC, China's national economy has maintained a steady and fast growth momentum this year. However, some problems, including a surge in fixed assets investment and lending, as well as a climbing trade surplus, still exist.

The central bank believes that although the consumer price index is still relatively low, the rapid increase in credit would likely overheat the economy and lead to inflation.

It is necessary to step up the currency control policy while continuing to stick to an overall stable principle, it said.

It is reported that commercial banks' required reserves at the central bank currently amount to 2.3 trillion yuan, in addition to 7 trillion yuan worth of floating state treasury bonds, financial bonds and central bank notes.

The hike of the required reserves by 0.5 percentage points can help freeze 150 billion yuan worth of floating money, according to bank sources.