Besides, the two types of tools will also interact with each other, that is, when the quantity is not within the reasonable extent, the price transmission mechanism will go wrong. At the same time, without in-depth reforms, the quantity-based monetary policy will also face all kinds of problems and affect the efficiency of the monetary policy.

Based on repeated analyses, the Central Bank should currently make comprehensive use of quantity- and price-based instruments to implement the monetary policy. It's hoped that the reliance on the quantity-based instruments will gradually diminish while more price-based instruments are brought into use. However, currently, both types of instruments are used either simultaneously, or in turn, include open market operations, deposit reserve requirements, interest rate, exchange rate, etc.

Reform coming first

A slowdown in reform will negatively impact China's economic development and the implementation of the monetary policy and more importantly, in the long run, it will hinder the formation of the mechanisms and systems that will ensure that the monetary policy can function as expected. Hence, from the perspective of the Central Bank, the process of pushing forward reform is also the process of maintaining currency stability (low inflation) and establishing a well-performing economic and financial system. We place much store in the reform and believe that this is the only way to cope with potential financial crises in the future. This is a different approach to that taken by more mature market economies.

The inflation targeting system, though not adopted in China at present, is a very important direction for future development. But, if priority is given to reform, then cooperation and coordination between the Central Bank and other government departments, under the leadership of the State Council, is vital to achieve tangible results, something that seems more important than the independence of monetary policy for the time being.

Still there remain several other problems. First, for years the growth rate of China's money supply (M2) has been higher than that of nominal GDP. Second, theoretically, the trade surplus and long-lasting high growth rate of M2 are likely to lead to inflation. Nevertheless, no obvious increase in the consumer price index has occurred except in a brief period in 2004. Third, under the influence of the Asian financial crisis, in order to remove itself from deflation, the Chinese Government has taken a series of measures: corporate restructuring, banking reform, boosting domestic demand and attracting foreign direct investment by improving basic infrastructures through a proactive fiscal policy. As a result, the country's manufacturing sector has sharply developed its productivity, which results in falling prices because of overcapacity. Fourth, China now boasts a high savings rate. Especially since the Asian financial crisis broke out, the savings rate has continued to climb, and is about 10 percentage points higher than that at the time of the crisis. A high savings rate will make it possible to make a large amount of new investment in basic infrastructure, industrial productivity and exports, but this will also lead to overcapacity. These intertwined factors make the analysis of economic and currency issues a complicated job.

Against this backdrop, we must think about the monetary policy and the use of relevant tools in an innovative way by taking careful actions based on close observation. As a developing economy in its transitional period, China must press ahead with reform, as only in this way will the monetary policy be effectively implemented and can we balance the relationship between reform, stability and development.