Chinese monetary strength has moderated in recent months but current trends continue to give a positive message for economic prospects.
The PBoC yesterday released additional monetary data for February, allowing calculation of the preferred narrow and broad measures here – “true” M1 (which adds household demand / temporary deposits to the official M1 aggregate) and M2 excluding financial sector deposits (which are volatile and contain little information about near-term economic prospects).
Six-month growth of real (i.e. consumer price index-deflated) true M1 fell sharply between October and January but stabilised in February and remains at a solid level by historical standards – see first chart. Earlier narrow money buoyancy was only partially reflected in GDP growth, tempering concern about the recent pull-back. Real true M1 growth, moreover, bottomed in late 2014 more than a year before the trough in GDP growth, so any economic slowdown may not occur until late 2017.
Real non-financial M2 growth strengthened less dramatically in 2015-16 and has arguably been a better guide to economic performance. A pick-up last summer / autumn suggests that GDP momentum will rise near term while a more recent slowdown has been modest and is of limited concern – first chart.
January / February activity data this week, meanwhile, suggest stable economic momentum. Six-month industrial output growth remains within its recent narrow range – second chart. Private investment continues to recover, rising by an annual 6.6% in January / February, with enterprise money trends still giving a positive signal – third chart. Worries about a sharp slowdown in housing momentum were allayed by data showing sales and starts growing by 23.7% and 14.8% annually – fourth chart.
Posts in late 2016 (e.g. here) suggested that solid economic growth and rising inflation concerns would prompt monetary policy tightening in early 2017, contributing to a slowdown in capital outflows. The PBoC today announced further 10 basis point increases in repo and MLF (medium-term lending facility) rates. Foreign exchange reserves, adjusted for valuation effects, rose in February for the first time since June, with the offshore / onshore forward yuan spread signalling the possibility of a further increase this month – fifth chart.