The latest official data indicates that growth in the broad M2 money supply reached its lowest level in nearly two years last month, maintaining its run of record lows.
Figures released by the People’s Bank of China indicate that the broad M2 money supply balance was 164.52 trillion yuan (USD$25.15 trillion) as of the end of August for a year-on-year increase of 8.9%, which is the lowest growth reading in 20 months.
Despite ongoing low growth in the M2 money supply total social financing saw a year-on-year increase of 13.1%, marking the second consecutive month that growth has remained above the 13% threshold, while new RMB lending was 1.09 trillion yuan, 143.3 billion yuan more than the same period last year and ahead of consensus expectations.
Deng Haiqing, chief economist with Jiuzhou Securities, said to National Business Daily that the marked increase in total social financing as well as RMB loan data beating consensus expectations was primarily due to efforts by policy makers to preserve economic stability, and strong willingness amongst banks to extend credit.
PBOC previously declared in 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) that lower rates of money supply growth could be a “new normal” amidst its ongoing deleveraging campaign and efforts to ensure that the Chinese financial system primarily serves the real economy.
PBOC has also previously observed that the increasing complexity of factors impacting the money supply means that the predicability and controllability of the M2 balance is on the wane, as is its relationship with the broader economy.
Medium and long-term loans to households, which consist primarily of home loans, accounted for 440 billion yuan, or 41% of new RMB lending in August.
The figure marks a decline of only 7.4 billion yuan compared to the previous month, with home loans still expanding rapidly as the tight property market controls imposed by the Chinese government fail to significantly dent expectations amongst buyers.
In tandem with the record low run for M2 money supply growth, certain key economic indicators have also posted a weak performance, with the total retail sales of consumer goods seeing nominal year-on-year growth of 10.1% in August compared to 10.4% the preceding month, and added-value of industrial enterprises above designated size posting growth of 6.0%, compared to 6.4% previously.
The low M2 growth rate has triggered calls within China for reductions in the reserve ratio, as financial institutions see their funding costs rise despite liquidity remaining essentially stable.
According to some observers monetary tightness in tandem with record low excess reserve ratios is making operating conditions more challenging for banks, which is in turn having an adverse impact upon other economic sectors.
Li Peijia, a senior researcher with Bank of China’s International Financial Research Institute, said that monetary tightness in tandem with rising rates were having a greater adverse impact upon manufacturing and private investment than generally imagined.
According to Li ongoing weak growth in the M2 money supply and the record-low excess reserve ratios of Chinese banks are exacerbating tightness in the financial system, for which the answer is more flexible and forward-thinking monetary policy, as well as a reduction in reserve requirements when appropriate, in order to prevent a weakening of expectations and further gains in interest rates.
Wen Bin, chief economic researcher with China Minsheng Bank, said after reducing the reserve requirement the central bank could then use reductions in MLF and reverse repo operations to mop up excess liquidity and maintain the stable, neutral monetary policy which is at the core of its current mandate.
For this reason appropriate reductions in reserve ratios are an effective means for reducing the cost of funds for financial institutions, and thus in turn the financing costs of the real economy.
Other observers contend, however, that easing growth in M2 money supply is to be expected amidst China’s ongoing deleveraging drive, and that given current economic conditions monetary policy and reserve requirements should be kept stable for the time being.
They are argue that China’s economy is currently in a stable and improving condition, and that there is no need to adjust monetary policy to boost market expectations due to potential adverse consequences.
At 8.9% M2 growth remains significantly higher than GDP, which posted 6.9% growth in the first half, as well as higher than growth in Chinese earnings.
Some analysts further argue that market liquidity isn’t excessively tight at present, and the real crux of the problem lies in an irrational capital distribution structure, which means that reductions in reserve requirements are no guarantee that freed up funds will be channeled to China’s real economy.