China’s monetary and fiscal policy - BIS Papers No 20, part 7, October 2003 China’s monetary and fiscal policy Li Ruogu In the past few years, the Chinese government has been pursuing an active fiscal policy to finance key construction projects by issuing government debt. Meanwhile, sound monetary policy has been implemented in coordination with the fiscal policy. With the coordination of the two policies, the trend of deflation has been contained, economic restructuring accelerated and economic growth further promoted. China’s GDP exceeded RMB 10 trillion in 2002 - a historic breakthrough. In recent years, reform of the fiscal revenue system has resulted in the steady growth of government revenue. In 2001, it amounted to RMB 1.6 trillion, 5.6 times that in 1990. The proportion of government revenue to GDP increased from 11% in 1994 - during the early stage of reform - to 17% in 2001. Significant progress has also been made in reforming the management of government expenditure. Despite the above achievements, there remain challenges facing China’s economic development, which are mainly reflected in the slowdown of government revenue since the beginning of 2002, the relatively high proportion of non-performing loans in the financial sector, weaker demand in rural areas and persistent employment pressure. In addition, uncertainties over the global economic outlook have had an impact on China’s exports and economic growth. To resolve these problems, the Chinese government will continue to boost domestic demand through proactive fiscal policy and sound monetary policy and further speed up economic restructuring and improve the quality and efficiency of economic growth. Major developments in recent fiscal and monetary policies are as follows. Monetary policy Since the beginning of 2002, the People’s Bank of China (PBC) has been pursuing sound monetary policy while promoting policy efficiency. The indirect policy instruments and mechanism have been improved.