An opinion piece in the flagship news publication of the Chinese Communist Party claims that the easing growth in China’s M2 money supply won’t have a major, adverse impact upon the broader economy.
Data from the People’s Bank of China indicates that China’s M2 money supply saw record-low year-on-year growth of 8.8% in October, for a deceleration of 0.4 percentage points and 2.8 percentage points compared to the preceding month and the same period last year respectively, bringing an abrupt end to the brief rebound witnessed in September.
M2 money supply growth has tapped a succession of record lows this year, as China’s ongoing deleveraging campaign stifles monetary expansion, triggering widespread market trepidations that may have contributed to a recent slide in domestic stocks to a three month low.
According to The People’s Daily, however, any of the adverse impacts of slowing M2 growth will be outweighed by the long-term benefits.
“A decline in the M2 growth rate marks a return to rational levels following several years of rapid expansion…it is of benefit to the prevention of financial risk, and will not produce any major adverse impacts for the real economy,” said the opinion piece entitled “M2 Growth Isn’t That Low” (M2增速, 没那么低).
“Over the past year or so, low M2 growth which is slightly contrary to the norm has drawn much attention. There are some who are concerned that continued low growth will put downward pressure on the economy, affect market liquidity, and drive interest rates higher.
“Looking at the data, monthly M2 growth which is under 10% is certainly slightly low compared to the past, but we should objectively understand the causal factors and actual impacts of this shift, as there is no need to overreact.”
According to The People’s Daily the chief cause of low M2 growth is financial deleveraging and stepped up regulation by authorities.
“In the past, high M2 growth had its objective causes, such as the monetisation of residential property and the rapid growth in wealth management product business.
“The recent slowdown in M2 growth is demonstrative of heightened financial regulation, a contraction in funding chains and a reduction in nested [investment]
“Following the progress of the financial deleveraging agenda, off-balance sheet financing channels has diminished…while some off-balance sheet financing has been transferred back on to balance-sheets, which has been expressed as an increase in bank credit, off-balance sheet financing has nonetheless come under greater pressure.”
The opinion piece further points to various forms of financial innovation as another factor weighing on M2 growth rates, by expanding investment channels in China and leading to a relocation of funds.
“Recent years have seen rapid growth in financial innovation, and constant expansion in the monetary storage channels of households and businesses, including bank off-balance sheet wealth management products, money market funds, online financial deposits, and various asset management plans.
“The monetary nature of these financial products is very strong…but they are not fully reflected in the financial reports of the banking system.
“In addition to this, many businesses and enterprises are choosing non-deposit forms of monetary storage such as money market funds, leading to sufficient bank deposits and increasing debt pressure, as well as a decline in the ability to generate loans.”
Slightly lower growth in the M2 money supply is very likely to become the “new normal,” while the relationship between M2 and GDP growth is set to decline, as the factors impacting the money supply become more complex.
The People’s Daily points to the diverging performance of M2 money supply and total social financing since the start of the year as evidence of this, following their close relationship in the past.
“Total social financing and M2 are two sides of the same coin, with the former reflecting support for the real economy from the perspective of total social funds supplies, and the latter reflecting total demand via the liquidity and purchasing power provided by the banking system.
“Since the second quarter of this year, total social financing growth has tended towards improvement relative to the decline in M2 growth, and continued to hold steady.
“This clearly indicates that financial support for the real economy has seen no diminution, and that liquidity in the real economy has not been excessively impacted by financial deleveraging.”