Chinese monetary trends continue to suggest moderate economic expansion and limited “excess” liquidity to fuel asset price bubbles. The monetary backdrop, in other words, is consistent with policy goals.
Six-month real M1 expansion, the favoured indicator here, rose sharply from 3.6%* in December to 6.8% in January – see first chart. The increase, however, is likely mainly to reflect the timing of the Chinese New Year – M1 expands temporarily around the holiday, which can have a positive or negative impact on end-January data depending on its date. The timing this year is similar to 2010 and 2008 – New Year falls on 10 February versus 14 February and 7 February respectively. Six-month real M1 expansion rose in January in both years but fell back significantly in February. A similar pattern is likely this year.
Six-month real M2 and credit expansion – as measured by bank loans and the wider “total social financing” aggregate – are shown in the second chart. Real M2 growth has been broadly stable recently while bank loan expansion has slipped to a 15-month low. Both are modestly below their averages over the last 15 years. Real social financing, by contrast, is relatively strong, reflecting fund-raising outside the banking system in the form of corporate bonds / bills and entrusted / trust loans. The view here is that such borrowing has little positive economic implication because it is not associated with money creation.
The gap between six-month real money and industrial output expansion is a gauge of “excess” liquidity available to push up asset prices. For both M1 and M2, this is currently positive but small, suggesting limited fuel for property or stock market strength.
*Seasonally adjusted, not annualised.
