"The basic tone is (still) stability, which involves little change," Dai Genyou, head of the Monetary Policy Department of People's Bank of China, was quoted as saying by the Beijing-based Economic Observer.

The monetary policy has guaranteed equilibrium between monetary supply and demand, and has therefore achieved the central bank's intended target in the first six months of this year, the business-content newspaper quoted Dai as saying.

But there are two snags which People's Bank of China, the central bank, has not seemed to tackle very well.

One is the uneven money distribution; the other is the seemingly unexorcisable phantom of deflation.

A central bank's survey in May has exposed that 80 percent of money out of the State-owned commercial banks eventually flows to only a small handful of so-called "excellent" customers, usually big-name firms with reliable credit record, while the majority of medium- and small-sized firms hardly find way to quench their money thirst.

Moreover, prices in the market keep going down, signaling a looming deflation.

"These problems indicate that there might lie some structural illnesses in the existing monetary system, to which monetary policy-designers usually feel at their wits end," Dai said in the newspaper.

The consumer price index has been inching down since last November. A consecutive two-quarter price slide is widely considered a signal of a threatening deflation, which usually brings about sluggish production, dormant investment and rising unemployment.

But Dai shrugged off the downward prices as a result of some exterior reasons instead of the steam-off economy.

After entering the World Trade Organization, China has slashed the tariffs of more than 5,000 commodities and has also canceled the quotas of a certain import items. These measures have driven down the once high prices of products, for example domestically made cars.

Technology update also tends to drive the prices down, according to Dai.

Over the past several months, prices of transportation, telecommunication, household appliances and service products chalked down 1.6 to 3.4 percent, which is mainly for the technologic advancement in their respective sector.

The last reason for the lower overall price level is the enlarging income gap in current China, especially between urbanites and rural residents.

Of the total consumption expenditures of China's households in 2001, consumption spending by farmers, about 62 percent of the country's 1.3 billion population, stood simply at 34.7 percent, down 12.8 percentage points compared to 1997.

So, here is a paradox: On the one hand, over 80 percent of consumer products are in glut; on the other hand, the vast market remains asleep because of farmers' meagre income.

"By no means can these problems be resolved purely through an expansionary monetary policy," the newspaper quoted Dai as saying. "Instead, it might even help to accumulate more thorny issues in the banking sector in the medium- and long-term run and endanger the financial stability."

In Dai's eyes, the present money supply is enough.

"An appropriate money supply increase for China's current economic operation should be 7 percent, but the actual grow rate has been over 14 percent," Dai said in the paper, "Which is sufficient even after taking into account some special requirements in China's ongoing economic restructuring."

Dai ask those who cry for bigger dosages of money into the economy to take a look at the over 7 percent annual growth rate of China's gross domestic product.

A dogmatic understanding of the deflation and the consequent slack money supply will incur two ghosts: the rising non-performing debts in banks and a possible inflation, according to Dai.

( July 18, 2002)