CONFIDENTIAL #2
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administrative direction, the Chinese authorities will need to have tools of macro-economic policy, particularly monetary policy instruments, so that they can counter cyclical fluctuations in economic activity. At the micro-economic level, the banking sector has an essential role in serving as a financial intermediary channelling
savers' funds to investors. This role has an important bearing on the efficient allocation of financial resources. At its present stage of development, China's banking sector is not adequately equipped for these tasks.
20.
In addition, there are a number of more specific problems. Firstly, as the Chinese financial system develops, the cash-to-deposit ratios will tend to be lower, and the money multiplier i.e. the potential credit
creation by the banks, larger. The transition to a larger money multiplier could pose significant problems of monetary control for the PBOC. For instance, if there are major shifts of funds between the "personal" and
"corporate" sectors of the economy, as at the end of 1984 when the enterprises awarded generous bonuses to their workers, the money multiplier could fluctuate widely, with potentially serious implications for the amount of business that enterprises can undertake.
21.
Secondly, the existing banking system in China is monopolised by a few specialised banks. Despite some recent measures to stimulate them, these specialised banks. generally lack innovative ideas to promote business. Hence, they are ill-suited to tackling the rapidly changing needs of borrowers and lenders in the Chinese economy as it develops. The newly set up CIB and CITIC as well as the re-vitalized CBOC are designed to introduce more competition and thus promote efficiency in China's banking system. But more will have to be done in this
direction.
CONFIDENTIAL 機密
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