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PBoC counsellor: M2 growth rate this year expected to be higher, exceeding 8.5%
2018/07/10 08:28:02

Jul 10, 2018 (China Knowledge) - China's broad M2 money supply growth rate is expected to be higher than last year, exceeding 8.5%, due to a decline in intensity of financial deleveraging, according to the People's Bank of China (PBoC) counsellor, Sheng Songcheng.

Sheng said in a press conference on the release of "2018 Macroeconomic Analysis and Estimates Mid-year report" at the Shanghai University of Finance and Economics Advanced Research Institute that the impact of financial regulation and deleveraging has been reflected in the growth rate of M2. According to central bank's data, China's balance of broad M2 money supply rose 8.3% from a year earlier in May to RMB 174.31 trillion. The growth rate remains flat as compared to the end of the previous month, but lower than the forecast of 8.5% and 0.8% lower than the same period of the previous year.

Historically, the growth in total social financing (TSF) and broad M2 money supply is in tandem, with the correlation coefficient reaching 0.88. In some months, the growth rate is exactly the same, for example, in the first quarter of 2016, when both reached 13.4%

However, due to the decline of broad M2 money supply year-on-year growth rate since October 2016, the difference between the growth rate of China's TSF and M2 has gradually widened. At the end of August 2017, the year-on-year growth rate of social financing scale (13.1%) was higher than the year-on-year growth rate of m2 (8.9%) by 4.2%, with the largest gap. "M2's year-on-year growth rate began to fall below 10% (9.6%) in May 2017, only maintaining single-digit growth, which has been one year," the PBoC adviser said.

China's May total TSF declines to RMB 760.8 billion (USD 118.80 billion), its slowest monthly growth since July 2016, according to data from the central bank. The figure, which is used to gauge the amount of liquidity and credit in the economy, is lower than the estimated RMB 1.3 trillion and 51% lower than April's value of RMB 1.56 trillion, as a result of stricter supervision and higher credit risk in the bond market.

The main reason leading to the decline is the contraction of the three main off-balance sheet activities: entrusted loans, trust loans and undiscounted bankers' acceptance bills.

Non-standard financing continued to shrink, entrusted loans decreased by RMB 157 billion, a year-on-year decrease of RMB 129.2 billion; trust loans decreased by RMB 90.4 billion, a year-on-year decrease of RMB 271.6 billion; undiscounted bankers' acceptances decreased by RMB 174.1 billion, a year-on-year decrease of RMB 49.6 billion. In May, these three items fell by a total of RMB 421.5 billion, a decrease of RMB 450.4 billion.

"That is to say, off-balance-sheet financing decreased by RMB 421.5 billion in total, a year-on-year decrease of RMB 450.4 billion, which is the main reason for the year-on-year decrease in the increase in TSF in May, " Sheng said. One of the goals of financial deleveraging is to find a way to push off-balance-sheet banking into the balance sheet and deleveraging in the financial system has already begun to bear fruit.

"In the future, with financial deleveraging gradually in place, the TSF and M2 growth rate will slowly converge," Sheng said. The central bank data reflects that the growth in broad M2 money supply in May is 2% lower than the growth rate of TSF (10.3%), which is reflective of shrinking difference between the growth rate of the TSF and M2.

Another concern is the correlation between broad M2 money supply and nominal GDP growth. In the past two years, the correlation between broad M2 money supply and nominal GDP growth has greatly increased. According to estimates, the correlation coefficient between broad M2 money supply and nominal GDP growth was 0.18 from 2008 to June 2016, but the correlation coefficient between broad M2 money supply and nominal GDP growth rose to 0.64 between June 2016 and the end of the first quarter of this year.

The PBoC adviser said that the correlation between M2 and economic growth will increase when capital flows to the real economy.

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