The programme will continue at least until the end of this year.

Last week, the central bank issued a record amount of 60 billion yuan (US$7.2 billion) of weekly commercial bills in open market operations. The week before, the bank issued 50 billion yuan (US$6.0 billion) of commercial bills.

Since late April the central bank has issued 445 billion yuan (US$53.6 billion) in short-term commercial bills to soak up excess cash.

"In the near future the central bank will not reduce efforts to drain money from circulation through open market operations, because money supply grew a little bit too fast," said Niu Li, a senior economist with the State Information Center.

M2 money supply, including cash in circulation, deposits and personal savings, had risen 20.7 percent at the end of July from a year earlier, figures from the central bank indicated.

The excessive growth, which is fueling credit expansion, has sparked worries about inflation and bad loans, Niu said.

China's consumer price index, a key gauge of inflation, rose a year-on-year 0.6 percent during the first seven months of 2003.

So far, the central bank's efforts to withdraw money have been preventative, not because inflation is actually happening, Niu said.

Wang Zhao, a researcher with the State Council's Development Research Centre, said: "It is necessary for the central bank to continue the efforts in the coming months."

"If the central bank does not continue the efforts, the money supply will grow even faster," Wang added. "The central bank has to spend a large amount of renminbi to buy hard currency on the foreign exchange market to reduce the pressure of yuan appreciation."

Foreign countries, including Japan and the United States, have repeatedly demanded that China appreciate the renminbi. But if that happens, the country's exports will be harmed, Wang said.

Central bank Governor Zhou Xiaochuan said China must maintain a stable yuan and stave off possible inflation to protect ordinary people.

An unstable currency value and runaway inflation would seriously erode the interests of the masses, Zhou said.

The central bank must take early steps to head off inflation because it could take six months or more for the effects of monetary policy to show up in prices, he said.

Fan Gang, director of the National Economic Research Institute, said the government should be wary of an overheating economy triggering inflation.

China's gross domestic product (GDP) grew a year-on-year 9.9 percent in the first quarter of this year but only 6.7 percent in the second quarter due to the outbreak of SARS (severe acute respiratory syndrome).

"If there was no SARS outbreak, the country's economy would grow more than 10 percent this year," Fan said. "If the economy grows more than 10 percent, it would become overheated and inflation would loom."

The central bank has always paid special attention to a possible overheated economy and inflation, Niu said.

"The effort to tighten credit since the second half of last year through the open market was a clear indication," he said.

Meanwhile, the central bank issued a much-anticipated rule in June aimed at tightening controls on loans to the fast-growing real estate industry.

The bank now requires commercial banks to lend strictly under the category of "real estate development credit," the authorized area which some banks were found going beyond in pursuit of bigger market shares.

The central bank also requires construction companies to stop allowing developers to use their working capital bank loans, a widespread practice it said had increased the construction firms' financial burdens, and only use them to buy construction equipment.

For home buyers, the central bank requires commercial banks to raise the down payment requirements for second homes, luxury housing and townhouses. But because of concerns that this might have a negative impact on profit, it has not always been practised.

"If the government's efforts to tighten loan control on the real estate sector do not help reduce money supply and the consumer price index rises for more than 10 months, the government is likely to raise the renminbi interest rate," Wang said.

But Niu Li said he is worrying about abrupt braking.

"The current money supply basically fits for the current economic development, although there are signs of overheating in some sectors such as cars and steel," he said.

Yuan Gangming, a senior economist with the Chinese Academy of Social Sciences, said the 20 percent growth in money supply is nothing to worry about.

In Japan, where money supply growth outpaced the sum of economy and consumer price index by a far broader margin, the Japanese Government went ahead last year to loosen money supply and economic growth came back to positive, he said.

Wang said the central bank should focus on structural adjustment in its monetary policy, concentrating on supporting development of small and medium-sized companies.

(China Daily August 25, 2003)