This paper analyses monetary policy evolution in China, focusing on the period from 1998 to 2002. Using correlation analysis and Granger-causality tests, this paper demonstrates that there is not a strong relationship between China’s base money and monetary aggregates M1 and M2, and, to some extent, money supplies are endogenously determined. A cointegrated vector autoregression and vector error-correction model is established to investigate relationships among China’s money supply, inflation rate and economic growth. Empirical evidence shows that within a long-time horizon, monetary aggregates are neutral and do not affect economic growth, but do determine the inflation rate in both the short and long term. In addition, this paper discusses the pros and cons of China’s various monetary policy instruments, the effectiveness of interest rate policy and the monetary authority’s offsetting operations of foreign reserve purchases.