The latest official data indicates that China’s money multiplier further rose to another record high at the end of July.
As of the end of July China’s money multiplier – defined as the M2 money supply balance divided by the base money supply – stood at a record high of 7.15, as compared to 6.92 at the end of June, according to data from the People’s Bank of China (PBOC).
As of the end of July China’s M2 money supply balance stood at 212.55 trillion yuan, while reserve currency – comprised of money issued (M0), financial company deposits (commercial bank deposit reserves) and non-financial institution deposits (primarily the customer deposits of payments platforms) stood at 29.72 trillion yuan.
The excess reserve ratio has also continued to decline, falling to 1.1% at the end of July.
Analysts impute the ongoing rise in China’s money multiplier to reductions in the required reserve ratio as well as a loosened credit environment in the wake of the COVID-19 pandemic.
Since the start of the year the Chinese central bank has cut the required reserve ratio for commercial banks in China on three occasions – on 6 January, 15 April and 15 May, unleashing long-term funds of approximately 1.2 trillion yuan.
As of the end of May the average deposit reserve ratio of Chinese financial institutions was 9.4%.
PBOC has previously stated that “reductions in the required reserve ratio lead to contractions in the central bank balance sheet…[this] not only will not cause the money supply to contract, but will in fact produce a very strong expansionary effect.”
The main reason for this is that reductions in the statutory deposit reserve ratio mean that commercial banks can reduce the amount of money lawfully locked in by the central bank, and the money that they can freely use correspondingly increases, thus increasing money creation capability.
Growth in the money multiplier is expected to be curbed in the second half as Chinese monetary policy returns to a more neutral position.
“When the money multiplier is excessively high, during the initial period of monetary policy tightening, tightening of the base money supply by the central bank could exceed expectations, and in the second period it is usually control of the scope of lending which is employed,” said Li Chao, chief economist at Zheshang Securities.
“We make the reminder that employment protection targets are about to be completed, and a high level of attention must be given to the central bank shifting its primary goal towards financial stability and thus tightening.”
“Looking at the current liquidity condition, the pace of credit extension will gradually decline, and there is not a high likelihood of further tightening of monetary policy,” said Ming Ming (明明), chief fixed income analyst at CITIC Securities.
“The pace of growth in the money multiplier is expected to gradually decline.”