China’s Money Multiplier Rises to Record High

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The rate at which base money created by China’s central bank is transformed into money in the real economy has reached its highest level since the turn of the century.

Bloomberg reports that China’s money multiplier, which is the ratio of broad money as defined by M2 to base money that the central bank creates, has risen to 5.33, which is the highest level on record since 1997.

This means that for every yuan of base money that the central money creates ex nihilo is being transformed into over five more units of currency in the real economy.

The monetary multiplier is compensating for the liquidity shortage caused by China’s ongoing deleveraging measures, as well as an evacuation of cash to overseas investment opportunities

It’s unlikely to ride high for much longer, however, with interbank borrowing rates rising above the loan prime rates offered by banks to their best customers, as the Chinese government continues to advance deleveraging efforts and curb the extension of risk-fraught credit.

Zhu Qibing, chief macro economy analyst at BOC International China Ltd., said that the money multiplier is close to its limit and credit expansion is likely to slow in future.

A recent report by China International Capital Corp sees PBOC using open market operations to ensure there’s sufficient cash in the economy, while Zhu also expects the central bank to allow the money supply to rise above the annual target of roughly 12%.

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