Chinese monetary trends suggest an improving economic outlook. With recent easing measures yet to have their full impact, money growth may lift further during the second half.
The preferred monetary aggregate here is the narrow “true M1” measure, comprising currency in circulation and demand deposits of corporations and households. As previously discussed, the official M1 aggregate omits household demand deposits, making it less reliable as a leading indicator, particularly when the outlook for consumer spending is shifting.
Six-month growth of true M1 rose to 4.8% in July (9.9% annualised), the fastest since December 2013 – see first chart. The increase has been smaller in real terms (i.e. relative to consumer prices) but growth is nonetheless above its average over the past three years.
The six-month change in real true M1 bottomed in December 2014, recovering in early 2015 – second chart. Six-month industrial output growth reached a trough in March, moving higher through July. With real true M1 still accelerating, output growth may remain around the current level or rise further into the autumn.
True M1 expansion picked up strongly in 2008-09 and 2012 after reserve requirements and interest rates were cut – third chart. Recent reductions have been larger than in 2012. Monetary trends have already responded to these actions but a further positive impact is likely.
