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
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Hot money, fickle by nature, may be turning its back on China. Figures showing that banks were net sellers of foreign currency in October for the first time since May last year suggest just that. They sold 24.9 billion yuan ($3.9 billion) worth in October versus buying 247.3 billion yuan worth in September. Reasons could be various: dollar flight in the face of the euro crisis; cooling property prices; expectations of near-term yuan appreciation evaporating. Be cautious, beyond our usual one month’s figures warning, of taking the numbers as a bearish sign for the economy that might turn the current “fine tuning” of monetary policy into something looser. The central bank says that credit is abundant and inflation remains relatively high.
Footnote: The central bank’s comments came after it broadened its M2 definition of the money supply, effectively bringing in the banks’ off-balance sheet lending, implicitly acknowledging that the old measure underestimated the money supply, and made it an unreliable benchmark of whether monetary policy was being effective.
The central bank has put some hard numbers on the switch it announced at the end of last year to more prudent monetary policy. The People’s Bank of China, in its quarterly monetary policy report, says it wants to slow the growth in the money supply to 16% in 2011. Last year, the money supply grew by 19.9% on its broad M2 measure. The bank noted that “inflation pressure is quite big” and says that controlling inflation will move up its policy agenda.
The relatively modest proposed slowing of monetary growth suggests the bank can only move cautiously to reduce the excess liquidity in the system. Interest rates, bank reserve requirements and open-market operations are the tools the bank says it has to rein in money supply and bank credit growth. So expect all to be continued to be deployed during the year — and the central bank to struggle to dampen inflationary expectations.
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.