A financial crisis has affected a series of Asian countries over the past year with negative implications for the regional as well as the global economy. Against such a turbulent situation, China's financial industry has made steady progress in the process of reform and development. Money supply has been growing steadily with the credit structure improved and lending by financial institutions has accelerated on a monthly basis; enterprise and household deposits have increased firmly; the state foreign exchange reserves have risen since the beginning of the year; the RMB exchange rate has remained stable; the financial markets have been developing smoothly and the financial institutions are well-positioned to fulfill payment obligations.

What lies behind this achievement is the fact that before the financial crisis hit a number of Asian countries, the Chinese government had already put in place a package of macro-measures aimed at containing reckless movements in the market and inefficient investment and rectifying the financial order, preventing and defusing financial risk. By adopting these measures, we have managed to maintain a favourable balance of payments, to increase foreign exchange reserves, improved laws and regulations for market activities and have effectively stopped disorderly competition in the banking sector. Soon after the eruption of the Asian financial crisis, the Chinese government convened a national financial conference and outlined a strategic plan. The plan aims to establish, within three years, a financial institutional system, a financial market system and a financial supervisory system compatible with the development of the market economy in China. The purpose is to upgrade substantially management levels in general so that the industry is better positioned to defend itself against financial risks. The efforts made by the Chinese government in preventing and defusing financial risks have constituted the corner stone in ensuring a steady development of the Chinese financial industry. These efforts are the foundation of our financial policy.

Since the beginning of 1998, we have introduced a series of measures in an effort to deepen financial reform and intensify financial supervision. The central bank has restructured its system by replacing all provincial branches with a number of regional branches and streamlining city branches where duplication existed. An insurance regulatory commission has been established to regulate and supervise the insurance business. The credit ceilings imposed on the commercial banks have been abolished while asset/liability management and internal control in the commercial banks have keen reinforced. The reserve requirement system has also been reformed.

Meanwhile, the Ministry of Finance has issued RMB27O billion yuan of special treasury bonds to replenish the capital base of the state banks. In addition, a five-level risk-based loan classification system, practiced internationally, has been introduced to classify assets of the commercial banks on a trial basis. The financial supervision responsibility system and the mechanism to administer market exits of financial institutions have also been improved. In addition the illegal activities of financial institutions have been punished while a group of institutions illegally engaged in financial activities have been closed down.

In the future, consistent efforts will be made to establish a modernised financial system with orderly market competition. Provincial branches of state commercial banks and their provincial capital branches will be merged. Regional financial institutions will be established to provide financial services for small and medium-sized enterprises and a deposit insurance company and a financial assets management company are also expected to be established.

Asset/liability management and the reserve requirement system for the commercial banks will be further improved and the five-level loan quality classification system will be applied.