M2 Target Cancellation Signals Shift in Monetary Policy Towards Price-based Tools

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Analysts say the absence of a concrete M2 money supply target in China’s 2018 Government Work Report flags a shift towards the use of price-based tools to implement monetary policy.

China’s Government Work Report for the year  has omitted mention of a concrete M2 money supply or social financing growth target, instead stating that “the main sluice gate of money supply will be properly managed, and rational growth in the broader M2 money supply, lending and total social financing will be maintained.”

Wen Bin (温彬), chief researcher with China Minsheng Bank, said to Securities Daily that while this year the basic theme of neutral and stable monetary policy would remain unchanged, the cancellation of M2 money supply and social financing growth targets marks a change from precedent.

According to Wen this shift can be interpreted in two ways, the first being that over the next several years one of the focal points for regulators will be the prevention of financial risk, meaning that they will longer formulate concrete targets for money supply growth.

The second is that following the rapid development of financial innovations, the “predictability, controllability and level of correlation with the economy” of the M2 money supply as an instrument of monetary policy has declined.

Given reference made by the 19th National Chinese Communist Party Congress to “deepening of interest rate marketisation reforms,” Wen expects that this means the central bank will shift monetary policy from quantitative tools towards price-based tools.

‘E yongjian (鄂永健), chief financial analyst with the Bank of Communications Financial Research Center, concurs with Wen’s assessment, telling Securities Daily that the absence of an M2 target from the Government Report shows that monetary authorities believe that the relationship between M2 growth and the economy has undergone change.

In 2017 China’s economic growth rate posted a rebound, despite the M2 growth rate falling to unprecedented lows.

According to ‘E China’s future monetary policy will place greater emphasis upon price-based adjustments, and the market will need to become accustomed to low rates of growth in the M2 money supply.

‘E said that while the relationship between M2 growth and economic growth is changing, this does not mean that it’s lost all significance as an indicator.

M2 will still serve as a key variable when observing the relationship between finance and the real economy, as China’s economic structure transitions, the balance sheets of financial institutions undergo change, and new financial products rise to the fore.

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