As for money supply, China's balance of M2 increased by 15.29% year-on-year at the end of September 2008, with the rate of increase dropping 1.65 percentage points compared with that at the end of April, and 1.43 percentage points from the end of last year, the lowest since June 2005. While the fall of M1 has been faster than M2, with the balance increasing by 9.43% year-on-year at the end of September 2008 and the increase rate dropping 11.58 percentage points, and 12.64 from a year ago, this represents the first time since April 2005 it has dropped by more than 10%.

Compared with the slowing increase of the money supply, renminbi loans have been increasing steadily. The balance of renminbi loans had increased by 14.48% year-on-year at the end of September, 1.62 percentage points less than the increase rate at the end of last year, and 2.65 percentage points less than a year ago. The increase of renminbi loans was RMB3, 480bn 01/2008-09/2008, increasing by RMB120bn year-on-year.

China has to deal with a lot of problems both home and abroad before being able to achieve expected economic growth and deliver steady financial operations. The problems include: (i) No end could be foreseen to the global financial turbulence, and there are increasing risks in China's economy. (ii) China's economy aooears to be falling too quickly, which counteracts the governmental goal of sustaining growth. (iii) Non-performing loans seem to be increasing, and China's government may squeeze credit. (iv) The flow of international short-term capital may change direction, which would threaten China's financial market.  

Inflation won't be the major problem to China's economy anymore, but rather, a rapidly falling economy and mounting financial risks would be the focus of the country's macroeconomic adjustment, which is "to prevent risks" rather than "to control inflation". After four years of being "moderately tightened" and "tightened", China's monetary policies are entering the stage of being "moderately loosened" and "loosened".

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Chapter One: China Starts Loosening Its "Tight" Financial Policies

1.1 Reserve Requirements Start Dropping after a Rise

1.2 China's Central Bank Started Cutting Interest Rates in the Second Half of 2008

1.3 Tight Control over Loans in the First Half of 2008 Began to Loosen in the Second

1.4 Open Market Operations are in Moving in Stride with Hedges, and Liquidity Management is Improving

Chapter Two: Operation of China's Financial Market

2.1 Increase of Money Supply is Slowing and the Growing Rate of M2 is ahead of That of M1 since May

2.2 Continuously Falling Stock Markets Help Deposits Become Regular and Residential Deposits are Returning to Banks

2.3 Renminbi Loans Deliver a Moderately Steady Increase

2.4 The Rate of Foreign Exchange Deposits Recovered is Increasing while the Increase of Foreign Exchange Loans Was Checked

2.5 There was an Overall Increase of Interest Rates in Money Markets

2.6 Appreciation of Renminbi has Seen a Rapid Increase Within a Wider Range

2.7 Volatile Stock Market Is Gradually Falling

2.8 Securities Delivers Overall Stable Trading

Chapter Three: Major Problems and Challenges China's Government has to Face in Adjusting the Country's Financial System

3.1 Unforeseeable Global Financial Turbulence has Increased the Operational Risks of China's Economy

3.2 There is the Risk that China's Economy May Fall too Fast, and the Task "to Ensure Continued Growth" Becomes a Major Concern

3.3 Less Pressing Inflation Takes "Inflation Control" off China's List of Major Tasks

3.4 Non-performing Loans May Increase, and Creates a Greater Possibility of a Credit Squeeze

3.5 The Flow of International Short-term Capital May Change Direction, Posing a Threat to China's Financial Industry

Chapter Four: Outlook for China's Monetary Policies

4.1 Sound Monetary Policies

4.2 Credit Policies Meant to Ensure Some Issues and Check Some Others to "Adjust Structure and Promote Economic Transition"

4.3 China's Central Bank Continues to Cut Interest Rates to Stimulate the Economy and Stabilize the Real Estate Market

4.4 Increase of Funds Outstanding for Foreign Exchange Slows, and Reserve Requirements Drop Again

4.5 Appreciation of Renminbi to Show a Marked Slow Down