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Bill discounting based on actual commercial papers is the kind of financing that has the closest link with the real economy, central bank rediscounting based on such discounting is not only an aggregate control instrument, but also a policy tool of a selective nature serving the needs of a particular policy target. After the reform of the formation mechanism for rediscount rate in March 1998, there were four consecutive cuts in the rediscount rate by the People's Bank. In particular, the rediscount rate was cut by 1.8 percentage points on June 10, 1999 from 3.96 percent to 2.16 percent on the occasion of interest rate reductions at financial institutions (central bank lending rate was lowered by 1.35 percentage points on average). The relatively large reduction in rediscount rate was intended to give the banks a comfortable spread, serving as incentives for them to expand discount activities. Policy effect proved to be significant. The amount of bankers' acceptance and discount exceeded 670 billion yuan and 630 billion yuan in 2000 respectively. With sterilization through open market operations, the PBC was able to support banks' discount activities by offering more rediscont even at a time when bank liquidity was relatively adequate. The year-end rediscount balance reached 125.8 billion yuan, up 75.8 billion yuan to more than twice the level of the previous year.