Chinese headline money numbers for August were moderately encouraging, suggesting that policy easing is gaining traction. Annual growth of the broader M2 measure was unchanged from July at 13.3%, the fastest since July 2014. Narrow money M1 growth, meanwhile, jumped from 6.6% to 9.3% – see first chart.

The August numbers contradict claims that heavy currency intervention would result in a contraction of domestic liquidity. Foreign exchange reserves fell by $93.9 billion in August, equivalent to 0.4% of the stock of M2 and 1.6% of M1. The impact of balance of payments flows on the money supply, however, is usually swamped by other influences – in this case, monetary and fiscal policy loosening.

The preferred money measure here is “true M1”, which adds household demand deposits to the official M1 measure*. An August figure for household demand deposits is not yet available; unless they fall sharply, however, annual true M1 expansion will rise further from July’s 6.4%.

The six-month change in real (i.e. CPI-adjusted) true M1 turned negative at end-2014, signalling economic weakness during the first half of 2015. It recovered, however, through July – second chart. Industrial output regained momentum in the early summer, although the August number due shortly may show a relapse, judging from survey evidence.

Broad credit trends remain soft: the estimated stock of “total social financing” rose by an annual 11.7% in August, down from 14.5% a year earlier**. Growth, however, has stabilised recently, consistent with a trough in economic momentum.

*The exclusion of household demand deposits from the official measure may reflect their historical unimportance. Official M1 = cash in circulation plus demand deposits of corporations and government organisations.
**Stock estimated by cumulating historical flows.