China's monetary policy: intermediary targets instruments and microeconomic and macroeconomic foundations

Financial sector plays a increasingly important role in China's economic development mainly in respect to supply of funds rather than efficiency improvement of funds allocation, the main direction of financial reform in the future is further financial liberalisation within a certain limit. Money supply (Ml,M2) as intermediary target of monetary policy is not out of date in China, while monitoring the tendencies of growth and inflation is also necessary in implementing monetary policy. China's monetary instruments are in a period of transition. Interest rates may replace others to become a leading instrument in the future while the preconditions are liberalisation of interest rates and separation of real base rates of the central bank and market rates. Currently, credit ceilings have to be maintained while some improvements should, and can, be made to a extent. There is potential for central bank lending to play greater role at present. In the relatively far future, both rediscount and open market operation can be of importance. Some distortions are present in both the behaviours of the banking sector, enterprises and the government themselves respectively and the relationship among the three sectors. Any improvement of effectiveness of China's monetary policy not only needs sound policies, but also relies heavily on the rationalisation of the relationship among the three sectors as solid economic foundation.