Oxford Analytica (OA), in its 2005 report on Monetary Policy Transparency in China, rates China's compliance with the International Monetary Fund's (IMF) 'Code of Good Practices on Transparency in Monetary Policy' as 'Intent Declared'. In April 2002, China joined the IMF's General Data Dissemination System (GDDS), marking a major step towards increased transparency in the reporting of economic data. According to OA, there have been no major advances in monetary transparency in 2005, although there have been important incremental improvements. Ongoing efforts indicate the desire for greater transparency, modernization and progress. There is still much room for improvement, including increased transparency of monetary policy decisions, and the communication of such decisions and their rationale. Other areas for improvement include: providing publicly available information regarding the Peoples' Bank of China's (PBC) profit and loss statements and expenses; providing a more detailed and clear balance sheet; and further improving timeliness of reporting. China moved to a managed-float exchange rate system in July 2005 based on a basket of currencies. However, IMF staff, in the 2006 Article IV consultations, argued that exchange rate flexibility, not just appreciation, is what is needed for China's economy going forward. Allowing the exchange rate to move more flexibly and be increasingly determined by market conditions would enhance monetary policy independence, helping the central bank to meet its policy objectives and reducing interference in the operations of the commercial banks. The lack of sufficient discretion given to the PBC to set interest rates is also an impediment to timely policy action.

General Overview

According to the 2005 report on Monetary Policy Transparency in China by Oxford Analytica (OA), there have been no major advances in monetary transparency over the past year, although there have been important incremental improvements. Ongoing efforts indicate the desire for greater transparency, modernization and progress. China moved to a managed-float exchange rate system in July 2005 based on a basket of currencies. (OA 2005, p. 54)

OA reports that the Chinese authorities have announced that they will sign up for a Financial Sector Assessment Programme (FSAP). The implications of this would be significant, and would involve an IMF ROSC (Report on the Observance of Standards and Codes) for monetary policy transparency, however the timing of the FSAP has not yet been decided upon. (OA 2005, p. 53)

The institutional framework of the People's Bank of China (PBC) is set out in the Central Bank Law of 1995, which mandates it to ensure the correct formulation and implementation of state monetary policies. The PBC's policy objectives require approval by the State Council, but the PBC continues to improve its professional competence. There has been an improvement in the technical capabilities of the PBC staff over the past year and commentators judged that officials in the central bank are open to develop financial innovation and increase transparency. (OA 2005, p. 54)

In April 2002, China joined the International Monetary Fund (IMF) General Data Dissemination System (GDDS), marking a major step towards increased transparency in the reporting of economic data. Commentators noted that there has been an improvement over the past year in terms of the availability of information, particularly in English. For example, the quarterly monetary report contains a greater degree of information than previously, and the China Banking Regulatory Commission (CBRC) provides additional information on non-performing loans of state-owned banks. Data is more accessible than it used to be, and it is perceived that both the PBC and the Ministry of Finance (MoF) are gradually keeping the media better informed of developments. Commentators also judged that the PBC is becoming more open and consistent with regard to targets. (OA 2005, p. 54)

There is still much room for improvement in the transparency and the disclosure of information in certain areas. China would benefit from increased transparency of monetary policy decisions, and the communication of such decisions and their rationale, which some commentators judged to be somewhat opaque. At present, no information is publicly available regarding the PBC's profit and loss statements. In addition, information on expenses and revenues -- while provided to the National People's Congress (NPC) -- is not released to the public domain. A balance sheet is published, although it lacks detail. There have been no improvements over the past year in the scope or timeliness of the central bank's financial statement, which is usually released with a time lag ranging from one to three months. The PBC did, however, publish an advance release calendar at the end of 2004 for this calendar year, and it has managed to uphold most of the commitments set in such calendar. No independently audited PBC financial statement is made publicly available. The Audit Bureau of the State Council publishes a report on government agencies, including the PBC, and the results of this are made available to the public. (OA 2005, p. 54)

In the 2006 Article IV consultation, IMF staff stressed the urgency of monetary policy actions to prevent a further acceleration of investment. More steps need to be taken to drain excess liquidity from the system and contain credit growth, including further intensification of open market operations together with additional increases in reserve requirements and benchmark interest rates. The authorities agreed on the need for containing investment growth, but maintained that legal and administrative measures were also needed to contain growth in specific sectors where overinvestment was a concern. (IMF 2006, p. 3)

IMF staff argued that a serious situation is looming, with substantial and growing liquidity in the banking system, continuing local government pressure on banks to expand their lending, and restraint on credit growth by the large banks diminishing as they complete their recapitalizations. In addition, financial innovations, such as the introduction of short-term corporate bills and discount bills, have lowered borrowing costs. Without a significant further tightening of monetary policy, a continued rise in credit growth would fuel a further increase in investment growth that would likely be followed by price declines in overcapacity sectors and an associated rise in banks' nonperforming loans. (IMF 2006, p. 14)

The IMF staff further noted that over time, it will be important for the PBC to formalize its policy framework, establishing an appropriate nominal anchor for monetary policy, and more clearly articulating its policy objectives. This would help to underpin market expectations about inflation, interest rates, and the exchange rate. In this regard, the now regular publication of the Monetary Policy Report by the PBC provides a convenient vehicle to increase the transparency of monetary policy formulation. (IMF 2006, p. 15)

On the contentious issue of the Chinese exchange rate management, IMF staff argued that exchange rate flexibility, not just appreciation, is what is needed for China's economy going forward. Allowing the exchange rate to move more flexibly and be increasingly determined by market conditions would enhance monetary policy independence, helping the central bank to meet its policy objectives and reducing interference in the operations of the commercial banks. The lack of sufficient discretion given to the PBC to set interest rates is also an impediment to timely policy action. (IMF 2006, p. 28)

Although the authorities have undertaken several reforms to improve the functioning of the exchange market, the rate remains tightly managed. Still, these reforms represent significant steps and can potentially allow market forces to play a substantial role in determining the exchange rate, while allowing banks and enterprises to hedge against greater variability in the rate. These steps have significantly improved the functioning of the spot and forward exchange markets, although these markets remain shallow given the limited variability in the rate. The PBC continues to dominate the foreign exchange spot market--the lack of any discernible appreciation in the renminbi-U.S. dollar rate in recent months, particularly when the dollar had been depreciating against other currencies, and the continued heavy accumulation of reserves serve to confirm this view. The average intra-day fluctuation in the renminbi-dollar rate has remained below the 0.3 percent limit, although it has increased in recent months. Moreover, after the initial 2.1 percent revaluation in July, the renminbi-dollar rate has appreciated by only about 11/2 percent. (IMF 2006, p. 16)

In the context of the consultations, the authorities stressed their commitment to the managed floating regime and argued that exchange rate movements since July 2005 were consistent with the new exchange rate arrangement. They noted that under this arrangement the exchange rate was determined by the supply and demand conditions in the foreign exchange with reference to a basket of currencies (with undisclosed weights). The rate was not intended to be directly pegged to the basket, and short-term deviations from the reference basket were to be expected. The appreciation of the dollar against other major currencies in the period after the July change had led to a deviation from strict adherence to the basket and accounted for the stability in the bilateral exchange rate through March. The authorities suggested that more recently, supply and demand conditions in the foreign exchange market were one factor accounting for the stability of the rate despite the sharp depreciation in the U.S. dollar, with the easing of capital controls in April possibly increasing the demand for dollars. (IMF 2006, p. 17)

The authorities further noted the substantial problems in making an assessment of the level of the exchange rate, particularly in China's case where there were large uncertainties over the underlying savings-investment balance, the implicit debt the economy faced in reforming the banking sector and social services, and possible speculative current and capital account inflows because of expectations of a renminbi revaluation. In addition, they argued that China's large current account surplus was less a result of an undervalued currency, but more a result of China's increased openness and the increasing shift of processing trade operations to China by multinational companies taking advantage of favorable labor market conditions. Restrictions on imports of high-technology products were another factor contributing to this surplus. The staff agreed that increased global integration has contributed to a growing current account surplus, but argued that this was not inconsistent with an assessment pointing to further undervaluation of the exchange rate. The authorities agreed that greater flexibility was needed over the medium term, but stressed that exchange rate reform would have to proceed in a gradual and controllable manner. (IMF 2006, p. 17)

Economic activity remained strong in 2005 and the first five months of 2006. Based on revised official data, GDP growth reached nearly 10 percent in 2005 and increased to 101/4 percent in Q1 2006, led by investment and exports. Inflation remains subdued, running at 11/2 percent in May. The external current account surplus rose to more than 7 percent of GDP in 2005, and the trade balance strengthened further in the first five months of 2006. This has led to a further large increase in foreign official reserves, which amounted to $925 billion at end-May. Credit and money growth have increased in recent months, prompting the authorities to take a number of monetary policy actions and administrative measures to try to contain lending and investment growth, but the impact of these measures remains to be seen. Strong revenue overperformance helped to bring down the fiscal deficit by 1/4 percentage point to 11/4 percent of GDP. (IMF 2006, p. 3)

The Principles

Clarity of roles, responsibilities and objectives of central banks.

ID

Oxford Analytica (OA), in its 2005 report on Monetary Policy Transparency in China, rated China's compliance with this principle as "Intent Declared". The People's Bank of China (PBC) is the central bank of the People's Republic of China (PRC). The 1995 Law on the People's Bank of China which mandates the PBC to ensure "the correct formulation and implementation of state monetary policies, instituting and perfecting a macro-control system through the central bank and strengthening supervision and administration of the banking industry." The PBC Law declares that the central bank's responsibilities are to: formulate and implement monetary policies; issue and administer the circulation of the local currency (renminbi); supervise banking institutions and the financial market; manage the foreign exchange and gold reserves, the treasury, and the payment and clearing system; supply banking statistics; and engage in international banking operations. The stated aim of monetary policies is to maintain currency stability and thereby promote economic growth. (OA 2005, p. 55)

In 2003, the supervisory function was transferred to a new entity, the China Banking Regulatory Commission (CBRC). This separation was continued at the provincial level in 2004. According to the OA report, although the central bank staff has high technical capacity, the CBRC is relatively small and so in the past there have been concerns that it had limited ability to supervise local branch offices. Over the past year, however, it has hired more staff and set up several local offices. Those in the local offices are familiar with the operations of the financial institutions in their regions, so there should be a corresponding improvement in the supervision capabilities. The Asian Development Bank is helping the CBRC with statistics systems and rating capacity, starting with foreign banks and later encompassing all commercial banks. The CBRC conducts regular exchanges with the US Fed and other central banks. Banking associations such as American Bankers Association (ABA) are also providing training assistance. (OA 2005, p. 55)

The PBC Law gives to the PBC the authority to use monetary policy instruments to achieve its policy objectives, subject to the approval of the State Council. Foreign exchange management is entrusted to the State Administration of Foreign Exchange (SAFE), a special government agency under the PBC. SAFE is responsible for the monitoring and control of the movement of foreign capital, and it ensures that the foreign exchange resources of the country are maintained at an appropriate level. It authorizes and registers all public and private entities that engage in foreign exchange and compiles statistics on foreign exchange, public debt, and investment flows. (OA 2005, p. 55)

From 2003, the Monetary Program has been publicly available (in Chinese and English), prior to its implementation. Although minutes of policy meetings are not available, a policy statement is released. China moved to a managed-float exchange rate system in July 2005 based on a basket of currencies. (OA 2005, p. 55)

The OA report notes that the PBC is not independent of the government in the administrative or operational sense, although it has gained some autonomy in the use of monetary instruments in recent years. For example, commentators suggest that the PBC is completely autonomous in its decisions to use open market operations. However, the State Council has authority over interest rate and exchange rate policy.8 Decisions made by the PBC are generally subject to macroeconomic policies formulated in conjunction with high-level committees of the Communist Party, the Ministry of Finance (MoF), and other powerful government agencies, such as the National Development and Reform Commission (NDRC), which have taken over the functions of the former State Planning and Development Commission. A significant change occurred with the separation of banking supervisory and monetary policy functions under the creation of the CBRC in 2003. (OA 2005, pp. 55-56)

The PBC Law states that the premier of the State Council nominates the governor of the PBC and is confirmed by the National People's Congress (NPC). The premier of the State Council also appoints and removes the central bank's deputy governors. The law vests responsibility for the conduct of monetary policy in the governor. It also has sanctions against the abuse of power, conflicts of interest, breaches of secrecy, embezzlement, bribery, and neglect of duties by officials of the PBC. (OA 2005, p. 56)

The relationship between the government and the central bank is clearly regulated by the PBC Law. In terms of fiscal autonomy, the PBC Law clearly proscribes the PBC's subscription to primary issues of government debt. This clause was inserted into the PBC Law to eliminate the automatic monetization of fiscal deficits by the PBC, which had been the case prior to 1995. As a result, the PBC has become more autonomous in the use of its instruments in recent years. The PBC has in the past asked state banks to extend loans to public projects that are partially funded by government bonds. Such policy lending officially ended when the PBC eliminated the annual credit plan for state banks in January 1998, but it has since been reinstated unofficially to support public spending. (OA 2005, p. 56)

The PBC has also asked banks to lend more to farmers, small- and medium-sized enterprises, and consumers purchasing cars and homes. The PBC itself is not permitted to provide loans to governmental bodies or departments, except to those non-bank financial institutions whose borrowing is specifically licensed by the State Council. The Ministry of Finance (MoF) sells government bonds to banking institutions. The PBC issues banking notes and is in charge of the inter-bank market of Treasury bond transactions. The PBC may also open accounts for banking institutions as needed, but it may not overdraw such accounts. It may organize or assist in organizing banking institutions to settle inter-institutional accounts. It may also determine the amounts, repayment schedules, rates of interest, and forms of loans to commercial banks, although the time limit for such loans cannot exceed one year. (OA 2005, p. 56)

The PBC Law mandates the central bank to manage the state treasury and administer the inter-bank payment and settlement system on behalf of the state. Reforms were initiated during the 1990s to establish a modern payments system and develop a national inter-bank money market. The PBC has a national clearing system that provides a local currency payment and settlement service for all banks. (OA 2005, p. 57)

In May 2004, the authorities indicated the start of a three-year period for coming into compliance with the anti-money laundering (AML) requirements of the multilateral Financial Action Task Force. The NPC began drafting AML legislation in March 2004. The AML legislation is still in the drafting stages. The plan is for the legislation to go before the Standing Committee before the end of the year. Joining the Financial Action Task Force is contingent on having an effective anti-money laundering law. In January 2005, 33 members of the FATF unanimously agreed to accept China as an observer. The NPC revised the Criminal Law in 1997 to include money laundering as a crime, and in 2003 the PBC issued regulations for financial institutions that included a framework for reporting and monitoring. The central bank is the supervisory authority for anti-money laundering operations by financial institutions, and now has a stronger AML bureau. The Rules for Anti-Money Laundering by Financial Institutions were enacted in 2003, and include a framework for reporting and monitoring. The NPC has ratified the UN Convention Against Transnational Crime. (OA 2005, p. 57)

Open process for formulating and reporting monetary policy decisions.

EN

Oxford Analytica, in its 2005 report on Monetary Policy Transparency in China, rated China's compliance with this principle as "Enacted". The People's Bank of China (PBC) seeks to achieve its monetary objectives through the attainment of publicly disclosed money supply targets. In theory, the state's Five Year Plan is the strategic basis, but in practice this has decreasing relevance. The PBC Law states that the PBC is the sole body responsible for setting interest rates. The PBC has stated that its long-term goal is to use interest rates to guide the demand and supply of capital. However, interest rates are not very effective in managing monetary policy in China today as capital markets are still underdeveloped. Some experts contend that exports are more influential in controlling the money supply than open market operations. In recent years, the PBC has liberalized the rates of the inter-bank funding market and foreign exchange deposits in excess of three million US dollars. In 2004, it liberalized lending rates of commercial banks. The PBC also trades in the domestic bond market to help state banks with liquidity problems, rather than to guide interest rates. On average, it has three to four open market transactions each month, but the volume involved is not known. (OA 2005, p. 58)

The PBC has a Monetary Policy Committee whose functions, composition, and working procedures are set out in the Regulation on the Monetary Policy Committee, issued on June 20, 1999. The Monetary Policy Committee is responsible for conducting monetary policy. The committee is comprised of the governor (chairman of the committee) and two deputy governors of the PBC; a deputy minister of finance; a deputy governor of the National Development and Reform Commission (NDRC); a member of the Ministry of Commerce; the head of the State Administration of Foreign Exchange (SAFE); the head of the China Securities Regulatory Commission; a member of the China Insurance Regulatory Commission; three governors of the nine PBC branches, representing the different regions of the country; and one economist. The PBC nominates, in consultation with other government departments, the committee's members, and the State Council makes the formal appointment. The regulations state that committee members should be under 65 years of age, with no criminal conviction, and over ten years of experience in finance. (OA 2005, p. 58)

The OA report further notes that the Monetary Policy Committee meets in the second week of the first month of every quarter, and the meeting has a quorum with at least two-thirds of committee members. At other times, meetings can be called with the approval of at least one-third of the members. The PBC has created a Monetary Affairs Analysis Team that meets on a monthly basis to review the macroeconomic environment underlying monetary policy. No advance meeting schedule is published. There is an unwritten understanding that meetings are held in the second week of the first month of each quarter. (OA 2005, pp. 58-59)

The Monetary Policy Committee publishes the decisions of its meetings in its official newspaper, the Beijing-based Financial Times. In addition, the PBC publishes a two-page report every quarter on the implementation of monetary policy in the Financial Times and other leading Chinese newspapers, such as China Daily. Annual Monetary Policy reports are also publicly available. From 2003, the PBC has been publishing in English its quarterly monetary policy reports. The PBC has also begun to use its Chinese language website to post more timely information about its work. Although the process is gradual, publicly available information has begun to be posted in English. Speeches by the PBC governor and deputy governors are regularly distributed by the Bank for International Settlements, with increasing frequency. (OA 2005, p. 59)

OA, in its 2005 assessment reports that commentators noted that there had been an improvement over the past year in terms of the availability of information, particularly in English. Commentators also judged that the PBC is becoming more open and consistent with regard to targets. However, they noted that the PBC currently sets targets at the beginning of the year, but it does not explain developments relating to the targets during the year. Additionally, commentators felt that there was still much room for improvement in the transparency of monetary policy decisions, and the communication of such decisions and their rationale, which some commentators judged to be somewhat opaque. (OA 2005, p. 59)

The PBC submits an Annual Report on monetary policies to the Standing Committee of the National People's Congress and makes public statements on its work several times a year in the domestic press. The governor also holds press conferences twice a year. In recent years, the PBC has become more active in soliciting opinions from the public. Two monetary decisions made in late 2002, namely the increase in bank lending to small and medium-sized enterprises and revising upwards the target growth for M1 and M2, were made upon the suggestion of private sector economists. The NDRC, which has responsibility for setting the prices of some key goods in the economy, holds public hearings for groups affected by price rises. These are publicized ten days in advance. (OA 2005, p. 59)

Public availability of information on monetary policy.

ID

Oxford Analytica (OA), in its 2005 report on Monetary Policy Transparency in China, rated China's compliance with this principle as "Intent Declared." According to the report, in April 2002, China joined the International Monetary Fund (IMF) General Data Dissemination System (GDDS), marking a major step towards increased transparency in the reporting of economic data. In recent years, the People's Bank of China (PBC) has been publishing more financial data on its official website, in its Annual Report and Quarterly Statistical Bulletin, and in the Financial Times. These data, released two to six weeks after the reference period, include broad money and credit aggregates, central bank aggregates, interest rates, stock market indices, international reserves and a depository corporation (banking) survey. Some statistics are already based on the IMF Balance of Payments Manual and the core principles of the Basel Committee. At present, no information is publicly available regarding the PBC's profit and loss statements. In addition, information on expenses and revenues -- while provided to the National People's Congress -- is not released to the public domain. A balance sheet is published, though it lacks detail. There have been no improvements over the past year in the publication of the profit and loss statements or of information on expenses and revenues. Neither has there been an improvement in the level of detail or timelines of the financial statement, which is usually released with a time lag ranging from one to three months. (OA 2005, p. 61)

Since June 2002, the PBC has been publishing more detailed statistics in its Quarterly Statistical Bulletin. With its participation in the GDDS, the PBC has made a commitment to prepare documentation on the methodology and procedures for compiling monetary and financial statistics, to provide more detailed statistics and to use more channels to disseminate data. The PBC has enhanced its compliance with GDDS requirements by improving its resources in terms of trained personnel. Commentators noted that the PBC releases little information on its balance sheet. The PBC did, however, publish an advance release calendar at the end of 2004 for 2005, and it has managed to uphold the commitments set in the calendar, with the exception of one promise to release information on foreign exchange reserves. Commentators noted that the PBC could improve the disclosure of information in certain areas, such as lending. (OA 2005, p. 61)

The source data are collected from the PBC's 'All Accounts' financial reporting system. This system electronically collects stock data on monetary statistics and banking supervision indicators in a uniform format from banking institutions, which use different accounting procedures. The system allows for the collection of detailed data for classifying bank accounts by economic sector and financial instrument. Data reporting units are periodically inspected to review implementation of reporting instructions and regulations issued by the PBC. (OA 2005, p. 61)

The OA report further notes that specialists in data collection and computerization are being recruited and transferred from local branches to improve data dissemination, and the central bank expects to launch a Center for Financial Statistics in the near future, though there has been little progress in this respect over the past year. Commentators stated that it is not uncommon for the PBC to state an intention to do something such as this and then not follow through on it. Commentators also noted that staff limitations are a concern in that there is the will to push through reforms, but this is constrained by the limited capacity to do so effectively in many cases. (OA 2005, p. 61)

The PBC's balance sheet is published monthly, 40 days after the reference date, and is available on the PBC website and in its Quarterly Statistical Bulletin. The central bank also reports such details to the IMF. In 1996, the Ministry of Finance (MoF) introduced a new accounting system, which is also followed by the PBC to prepare its balance sheets. (OA 2005, p. 62)

The PBC does not disclose information on emergency financial support. The OA report criticizes that the PBC's relationship with state banks and other financial institutions operates in a highly arbitrary and ad hoc manner. State banks look to the central bank for help and other concessions. In the past, failed financial institutions were either allowed to go bankrupt or were supported by funds from local governments and the MoF. The creation of the China Banking Regulatory Commission (CBRC) has improved the lending mechanisms to financial institutions. In the past, requests for funds from commercial banks were automatically granted by the PBC. The PBC retains responsibility for ensuring the overall stability of the financial sector. (OA 2005, p. 62)

The Chinese version of the PBC website has been gradually increasing the availability of information, and although at a very different speed, some improvement can be seen in the English version. Two government-backed websites, run by the China Foreign Exchange Trade System, have articles in English on monetary issues written by top PBC officials and other useful data on China's money and bond markets. To explain the central bank's policies to the public, senior PBC officials appear in question and answer sessions published in the Financial Times and broadcast on the national China Central Television. During 2005, the PBC has improved the availability of information in English on its website. Figures for monetary survey, exchange rate, gold and foreign exchange reserves, statistics on foreign exchange and balance sheets of the PBC are also publicly available. Regulations issued by the PBC are also available on the website, in major newspapers, and government gazettes. While there is a statement accompanying monetary policy decisions, there are no minutes. (OA 2005, p. 62)

The OA report also that the PBC website in 2005 contained more comprehensive quantity and quality of information regarding monetary policy. It regularly published speeches by the chairman. The Bank for International Settlements regularly publishes, and distributes by email, speeches by PBC officials on its website. The National Development and Reform Commission (NDRC) publishes on its external website a list of the prices which it sets. The CBRC website posts quarterly non-performing loans data. The Ministry of Commerce provides a valuable searchable and indexed website in English, and regularly hosts information from other government departments. Nevertheless, availability of information is still irregular across ministries. (OA 2005, p. 62)

Accountability and assurances of integrity by the central bank.

ID

Oxford Analytica (OA), in its 2005 report on Monetary Policy Transparency in China, rated China's compliance with this principle as "Intent Declared". The People's Bank of China (PBC) Law requires the PBC to submit work reports concerning monetary policies and financial supervision and control to the Standing Committee of the National People's Congress (NPC). In addition, summary versions of these reports are available to the general public. In the past, the NPC was regarded as a rubber stamp of the government. In recent years, it has become more vocal on certain economic issues, although it remains subservient to the Communist Party when it comes to major government decisions. Officials of the PBC are answerable to the State Council and the NPC when called upon to appear, normally on a quarterly basis. (OA 2005, p. 63)

The PBC Law states that the PBC must abide by the state accounting system in managing its revenues and expenditures, and is subject to the auditing and supervision of the China National Audit Office (CNAO) and the financial department of the State Council. It also must abide by the Statistical Law of 1996, under which it is illegal to misreport or tamper with data, or release data without approval. In the absence of detailed information, it seems likely that the PBC's accounting procedures reflect the drawbacks of China's accounting practices. These are broadly consistent with International Accounting Standards, but there are still several shortcomings in terms of transparency and their consistent application, in addition to the lack of timely public disclosure and accuracy of basic data. The PBC uses a cash-based accounting system, while banking institutions use accrual-based accounting. The latter evaluates fixed assets and other investments at cost, not at market value. Capital is generally inflated by liberal asset revaluations, while provisions made for bad loans are grossly insufficient. The UN System of National Accounts is nominally adhered to, but the continued application of traditional accounting procedures hinders accuracy. There is, however, a willingness within the PBC to improve the quality of statistics, as required by the General Data Dissemination System (GDDS). (OA 2005, p. 63)

The PBC publishes its monthly balance sheets, but not its profit-and-loss statement. The central bank is working to remedy this problem, but until staff shortfalls are addressed, no significant improvements can be expected. The budget of the PBC is incorporated in the central budget after examination and verification by the financial department of the State Council. The PBC submits information on its expenses and revenues to the Ministry of Finance (MoF) and the NPC, but this information is not publicly available. No independently audited PBC financial statement is disclosed. The Audit Bureau of the State Council does, however, publish a report on government agencies, including the PBC, and the results of this are made available to the public. The most recent report on the PBC reported that the PBC had been found to be involved in certain illegal practices. The report was published in the media and was made available online. (OA 2005, p. 63)

According to the OA report, the State Auditor conducts an audit of the PBC each year, but its findings are not publicly available. In addition, the PBC has an Internal Auditing Department that audits the accounts of all PBC departments and the financial institutions under its supervision. Information on the central bank's internal governance procedures is not disclosed publicly. Its accounting policies and internal audit arrangements are based on regulations and guidelines issued by the CNAO. The CNAO's Department of Monetary Audit audits the operations of the PBC and banking institutions under its supervision. (OA 2005. p. 64)

The PBC Law specifies general standards for the conduct of personal financial affairs by officials and staff of the central bank. In particular, it details measures relating to the wrongful provision of loans, the provision of financial guarantees to a unit or individual, the unauthorized issue of funds, breach of confidentiality, embezzlement, bribery, malpractice for personal gain, abuse of powers and neglect of duties. There is no established legal protection for officials and staff of the PBC in the conduct of their official duties. (OA 2005, p. 64)