DOWN IN THE detail of the monthly monetary aggregates for March released earlier this week is the curious point that the M2 measure of money supply slowed its growth even as new bank lending appeared to speed up.
M2 rose 11.6% year-on-year in March, down from February’s 12.5%. New bank lending in the first quarter, at 3.61 trillion yuan ($582 billion), was up 20% year-on-year.
With our usual caveats about reading too much into one month’s figures and making apples and oranges comparisons, it does seem that a large increase in lending hasn’t translated into economic activity in the real economy. Even allowing for the slowing of the economy, it looks as if intermediary credit is being rolled into the banking system — or to put it another way, out of shadow banking and into the (hopefully) cleansing light of the formal banking sector.
Given the warning contained in the IMF’s latest World Economic Outlook published earlier in the week that shadow banking was one of the main vulnerabilities of China’s economy —a warning repeated in the Fund’s Global Financial Stability Report, which said curtailing the riskiest parts of shadow banking should be China’s overall financial stability priority — and the central bank’s long standing concerns about the systemic risk that the $3.2 trillion sector poses to financial system, that is to be welcomed.
Filed under Banking, Economy
China’s monetary policymakers have been putting their money where their mouths are. After weeks of expressions of concern over the volatility of the global economy and the risks slow growth in the U.S. and Europe’s euro debt crisis pose to the country’s growth, it is now clear that they have been pumping credit into the economy. New bank lending in December reached 640.5 billion yuan ($101 billion), up from 562.2 billion in November. The M2 measure of the money supply rose 13.6% year-on-year, up from November’s 12.7% y-o-y rise. (Announcement.) This goes a bit beyond the “fine tuning” of monetary policy that is the official stance. Both December numbers surprised economists, who are now convinced policy easing is well underway, and another cut in banks’ capital reserve ratios, symbolic though that is, likely before New Year.n
The recently concluded annual economic policy meeting set a growth goal of 8% for 2011 with the inflation target raised to 4% from 2010’s 3% and new bank lending to be held at 7.5 trillion yuan ($1.1 billion), according to local press reports quoting authoritative sources. The broad money supply (M2) is set for 16% growth, a slowing from the 19.5% rate it is running at this year, as monetary policy continues to be gently tightened to tackle inflation. All in all, a modest application of the liquidity sponge, and one which suggests a growth rate target of 8% looks unrealistically low.
Other headline goals for 2011 include creating more than 9 million new urban jobs, keeping the official unemployment rate below 4% and extending the incentives for new appliance sales in the countryside emphasizing the tilt towards social goals, income equality and more domestic consumption that are priorities in the new five-year plan that starts next year.