M1, including cash in circulation and deposits, was expected to show 15.8 per cent growth at the end of last year, against the government target of up to 19 per cent.

In 1996, M2 rose 25.3 per cent while M1 was up 18.9 per cent.

The slowdown in monetary supply has reflected the deflationary pressure in the economy, characterised by weak demand and falling prices, as well as a build-up in inventories.

The PBOC's M2 forecast was based upon projections of a 9 per cent economic growth rate and 6 per cent inflation for this year.

Last week, the State Statistical Bureau forecast that the mainland economy would grow by between 8 and 10 per cent this year, with inflation remaining low.

Last year, the economy grew at a preliminary 8.8 per cent, the slowest pace for six years. The benchmark retail inflation rose 0.8 per cent for the year.

Economists said growth could slow further this year, probably below 8 per cent, if the government did not stimulate the economy. A slowing economy would spell trouble for the government's ambitious reform of state firms, pushing up unemployment.

They have been expecting Beijing to cut interest rates and boost investment for housing and infrastructure.

In a separate development, turnover on the yuan interbank market surged yesterday, as banks covered their short positions, dealers in Shanghai said.

Turnover rose to 950 million yuan (about HK$884.35 million) from 100 million yuan on Sunday, with the 60-day contract the most actively traded.

Dealers said the market would likely see more activity this year, with Beijing expected to take measures to help boost trading.