Chinese economic news is likely to improve over the summer but narrow money trends suggest that growth will remain sub-par.
The PBOC on Friday released additional monetary data for May, allowing the calculation of the “true” M1 measure monitored here. As previously explained, the official M1 series comprises currency in circulation and corporate demand deposits, i.e. it excludes household demand deposits. This is a major deficiency when policy is attempting to shift to consumption-led growth. True M1 corrects this omission.
The first chart shows six-month rates of change of industrial output and real (i.e. inflation-adjusted) true M1. The latter contracted in late 2014, correctly warning of recent economic weakness. Its six-month change has recovered in 2015 but current growth is no higher than a year ago. Six-month industrial output expansion may revive from about 2% currently to 3-4% during the second half (i.e. 6-8% annualised).
The second chart separates out corporate and household demand deposits. The latter have tended to lead in recent years and remain weak currently, suggesting that policy easing has yet to stimulate consumer spending. True M1 growth is being driven by corporate demand deposits, which include deposits of state-owned enterprises. A near-term economic pick-up based on higher corporate / state spending may not be sustained without consumer follow-through.
