The Asia Global Payment Summit. Bali, Indonesia. 10-11 October 2019

China’s M2 Money Supply Growth Expected to Remain in Single Digit Territory in 2018

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Analysts expect growth in China’s M2 money supply to remain at historically low levels in 2018, following a year in which it tapped unprecedented lows.

In March 2017 Beijing released a work report setting the full year M2 growth target at 12%, as well as requiring that monetary policy be kept “stable and neutral,” while maintaining fundamentally stable liquidity.

China’s heavy-handed deleveraging campaign, however, soon took M2 growth levels to a run of unprecedented lows.

In May 2017 M2 growth entered single digit territory, with the People’s Bank of China subsequently declaring that these low levels could soon become the “new normal.”

M2 growth tapped a new record low of 8.8% in October, before staging a modest rebound in November to 9.1%.

Analysts note that M2 growth’s fall beneath prior forecasts was primarily due to Beijing’s financial deleveraging campaign, as well as a diminishing correlation between the M2 money supply and other forms of economic activity, with certain substitutes for bank deposits not yet fully reflected in financial reports.

At the recently convened Central Economic Work Conference, policymakers said that the theme for monetary policy in 2018 would be “stability…and the maintenance of neutrality.”

Domestic reports expect Beijing to set the M2 growth target at around 9% in 2018, in order to curb debt risk as well as contain asset bubbles.

Wen Bin (温彬), chief researcher with China Minsheng Bank, said to 21st Century Business Herald that the economic deleveraging campaign is set to continue, with new rules on asset management leading to slowing growth in off-balance sheet wealth management products and interbank operations, which would impact M2 supply.

Wen believes a slower M2 growth is the likely long-term trend, and that keeping M2 growth above the double-digit threshold will be difficult.

Li Yang (李扬), chief director of China’s National Institution for Finance & Development (国家金融与发展实验室), said in 2018 M2 growth would continue to remain in the single digits, and approach actual growth this year.

Capital has tightened considerably in the wake of easing M2 growth, with rates repeatedly rising to unprecedented highs, raising concerns about the impact of continued slow growth upon lending and liquidity in 2018.

Yan Ling (闫玲), macro-economics researcher with China Merchants Securities, expects lending growth to decline in 2018, due to increased pressure on household lending growth from the Chinese central bank, as well as increases in rates for household loans greatly outpacing those for corporate loans, putting a dampener on demands for capital.

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