unprofitable enterprises controlled by political cronies. Much of China's bad debt situation can be blamed on local politics and pressure to preserve jobs (Walker, 1996b, 4).
Inflation has fallen sharply, with the consumer price index rising 9.8 percent in the year to March compared with 25.5 percent for 1994. Retail price inflation was down to 7.7 percent and has held up well for the current year. Gross domestic product rose at an annual rate of 10.2 percent in the first quarter of the year compared with 11.2 percent in the same period of 1995 (Montagnon, 1996, 3). Because of these relatively good performances the central bank has announced a gentle relaxation of monetary policy in early May, with a cut of 0.98 percentage points in one year deposit rates.
The central bank, which publicly remains committed to a moderately tight money policy in the medium term, has in fact been quietly easing credit conditions for some time. Forward looking indicators, such as new loan growth which was 14.6 percent in the first quarter, suggest activity should
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