Chinese Central Bank Says Lower Growth in M2 Could Become New Normal

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The People’s Bank of China has flagged the potential for a far lower rate of growth in the country’s M2 money supply in future compared to previous years.

On 11 August China’s central bank issued its “2017 Second Quarter China Monetary Policy Execution Report” (2017年第二季度中国货币政策执行报告) pointing out that in the first half of the year the economy maintain stable, relatively rapid growth, with key indicators outperforming forecasts.

With respect to the recent, comparatively low rate of growth in the M2 money supply, PBOC said that this was a rational reflection of China’s ongoing crackdown on the financial sector, which has involving a tightening of regulatory scrutiny, a contraction in “capital chains” and a reduction in financing “layers.”

According to PBOC in the past M2 growth was higher than nominal GDP growth, which is closely tied to what it refers to as a “monetisation” of residential property, and while current residential property commercialisation rates are very high, growth in the demand for money has seen a corresponding decline.

Comparatively rapid M2 growth in recent years is also tied to “deepening financialisation,” as exemplified by the rapid growth of interbank and wealth management product business.

For these reasons PBOC indicated in the report that slightly lower M2 expansion could become the new normal as China’s deleveraging campaign advance and regulators strive to ensure that the financial sector “returns to service the real economy.”

As of the end of June the broad M2 money supply was 163.1 trillion yuan, for year-on-year growth of 9.4%, and a slowdown in growth of 1.2 percentage points compared to the end of March.

The M1 money supply was 51.0 trillion yuan, for a year-on-year increase of 15.0%, and a slowdown in growth of 3.8 percentage points compared to the end of March.

The M0 money supply in circulation was 6.7 trillion yuan, for a year-on-year increase of 6.6%. The money multiplier was 5.37, while the excess reserve rate was 1.4%.

The first half saw a net cash withdrawal of 132.6 billion yuan, for an increase of 92.8 billion yuan compared to the same period last year, while the M1 and M2 “price scissor” shrank to 5.6 percentage points, maintaining the trend of contraction which commenced in August last year.

In mid-July PBOC Ruan Jianhong, PBOC’s head of statistics, said at a press conference that the slowdown in the M2 money supply was the “objective” result of internal deleveraging within the financial sector, and that low monetary growth could be “the new normal” for the Chinese economy.

“As long as the rational financing needs of the real economy are satisfied, easing in M2 growth in actuality reflects an increase in the turnover efficiency of existing money, and M2 growth which is lower than in the past could become the new normal,” said Ruan.

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