China’s M2 Growth in May Falls to Historic Low Amidst Deleveraging

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The growth in China’s M2 money supply dropped to an unprecedented low as ongoing efforts by regulators to deleverage the economy take effect.

The latest data from the Chinese central bank released on 14 June indicates that China’s M2 money supply balance was 160.14 trillion yuan in May, for growth of 9.6% compared to the same period last year, yet a growth rate decline of 0.9 and 2.2 percentage points compared to the preceding month and May 2016.

In addition to falling short of consensus expectations, the M2 growth reading for last month is also the lowest on record.

The People’s Bank of China imputed the record low in M2 expansion to two reasons, the first being internal deleveraging within the financial sector itself, as evidenced by easing growth amongst commercial banks that are highly involved with interbank lending, asset management and shadow banking, which has led to a corresponding slowdown in deposit and M2 growth.

PBOC said that an increase in fiscal deposits also held back M2 growth by 0.3 percentage points,with a rise of 392.8 billion yuan compared to the same period last year to 554.7 billion yuan.

China’s government work report had previously stated that M2 expansion would hold steady at 12% this year, yet the growth rate has fallen continuously over the past four months amidst a deleveraging campaign that has left interbank lending, asset management and off-balance sheet business hard hit.

It’s not clear, however, if PBOC will adjust its monetary policy in order to meet this growth target, with one official stating that “as deleveraging deepens and the financial sector further returns to servicing the real economy, an M2 growth rate that is slightly lower than previously could become the new normal.”

Xie Yaxuan, macroeconomic analyst with China Merchant Securities, said that easing growth in M2 could have an adverse impact upon fixed asset investment and hold back economic growth.

However, it’s expected that the cost of total social financing will only see a modest gain, given that the M1 money supply is affected by policy rates as opposed to market rates, and that forcing financing back onto balance sheet will also serve to reduce costs.

Xie also notes that the main driver of China’s economy has also already shifted from investment to consumption, which is affected by incomes more than interest rates or capital supply. For this reason if income improves and consumption can hold steady, it will offset any declines as result of tightened liquidity.

 

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