China’s December M2 money and loan growth soars

The Shanghai Daily reports that CHINA'S money supply jumped the fastest in seven months.

(emphasis mine)
[my comment]

China's M2 posts fastest climb
By Zhang Fengming 2009-1-14

CHINA'S money supply jumped the fastest in seven months as the central bank eased M2 to stimulate the economy, the central bank said yesterday.

M2, the broadest measure of money supply, rose 17.8 percent in December from a year earlier, up from November's 14.8 percent growth, the People's Bank of China said on its Website yesterday.

The supply of new yuan grew to an 11-month high to reach 771.8 billion yuan (US$115 billion). The growth of new-yuan lending hit the second highest level since April 2003. New-yuan loans grew 4.91 trillion yuan last year, up 1.28 trillion yuan from a year ago.

Industrial Bank Chief Economist Lu Zhengwei said that the soaring credit growth, supported by government measures, has helped shore up money supply.
[The Chinese money supply doesn't need shoring up]

The central government in November announced a massive 4-trillion-yuan stimulus package to ride out the economic downturn, including encouraging big state-owned banks to add credit support to infrastructure projects.
The central bank, meanwhile, shifted its monetary policy from "tight" to "moderately easing" in the fourth quarter.

Other measures included lifting credit quotas and the reserve requirement ratio and cutting interest rates to free up more liquidity in the economy. [Chinese authorities are going to regret all this "liquidity" they are pumping into their economy. Mark my word.]

"After analysis, we found that most of the newly added lending is for government-backed projects or bank bills whose risks are relatively low, indicating that banks are still cautious and conservative in issuing credit," said Lu yesterday. "Credit will very likely remain stagnant in the second half of this year."

Lu said the central bank is likely to ratchet down the reserve requirement further by 50 percentage points and cut the interest rate by 27 percentage points.

The central bank has cut interest rates five times since September,
cutting the one-year benchmark lending rate by 1.89 percentage points to 5.31 percent. [compare that to the US's zero percent interest rate. When China has so much room the cut interest rates, why in the world are people worried about deflation?]

Now, larger banks like the country's Big Five face a reserve ratio of 15.5 percent
[that is still insanely high] while smaller players like city-level commercial banks operate under a 13.5-percent reserve requirement.

Huang Yiping, a Citibank economist, said China is likely to achieve an average of 8 percent economic growth in 2009.

Huang said that once inventory adjustment is over, probably by the end of the first quarter, production should rebound rapidly.

Forbes reports that China's December M2 money and loan growth soars.

Thomson Financial News
China's December M2 money and loan growth soars
01.13.09, 04:53 AM EST

BEIJING, Jan 13 (Reuters) -
Annual growth in China's broad M2 measure of money supply surged to 17.8 percent in December from 14.8 percent in November, the central bank said on Tuesday.

Banks extended 772 billion yuan in new yuan loans in the month, much more than November's total of 476.9 billion yuan, offering further evidence that the central bank's efforts to stimulate credit in support of the government's economic pump-priming are having an effect.


-- Median forecast for M2 was 15.0 percent
-- Yuan lending up 18.8 percent, exceeding forecasts of a 16.5 percent rise.
-- Growth in FX reserves slows, rising $40.4 billion in fourth quarter to end year at $1.946 trillion [more money printing]


JING ULRICH, CHAIRMAN OF CHINA EQUITIES AT JP MORGAN IN HONG KONG, IN A NOTE TO CLIENTS: She said the jump in M2 growth suggested that the recent aggressive cuts in reserve requirements are having some impact on improving liquidity.

'Banks are being afforded more flexibility to determine appropriate lending rates to facilitate the funding needs of corporations and key infrastructure projects.

'At the same time, they have been urged to finance sound companies that may be encountering temporary cash flow difficulties and to provide assistance to qualified first-time homebuyers.

'While inflating the country's money supply should help ensure financing for priority projects, appropriate precautions must be taken to guard against a rise in credit risk.

'The immediate impact on consumer demand may be somewhat modest, given the relatively early development of consumer credit in China.'


'The surge in new yuan loans was mainly to supplement government spending of 100 billion yuan in the last two months of the year as part of the stimulus package.

'Such a large amount of new lending is likely to continue in the first quarter as banks try to seize the opportunity and lend to the best infrastructure projects as they start the year.

'But I doubt the momentum will continue in the second quarter or beyond.

'The central bank will cut interest rates and required reserve one more time before the Lunar New Year to lower the funding cost for factories.'


'The figures are encouraging; it seems the government's stimulus policy has achieved initial results. However, the acceleration in lending and money supply can only ease the slowdown. It will take longer for indicators like corporate profitability to recover.' [it can do more than "ease the slowdown". It can cause hyperinflation]


'The big figure looks pretty promising. The credit growth is robust. The monthly new RMB lending is a massive number. It's probably rising a few hundred percent year on year. [he is happy about that? It scares the hell out of me] This is extremely robust, indicating that the government's fiscal policy has jump-started credit growth.

'The money supply and lending figures indicate that the loose monetary policy is having a strong effect on monetary conditions, but we still need to see that being transmitted to the physical economy in terms of domestic demand. We haven't really seen that yet.'

[I can't belive all these economist are really worried about deflation in China. Do they even understand how the dollar peg works?]


For details, see the People's Bank of China website at Latest releases may not be immediately available.


-- The yuan closed at 6.8341 per dollar compared with 6.8358 before the data came out. The Shanghai stock market had closed with a loss of 1.95 percent percent before the figures were published.


-- The State Council, or cabinet, said on Dec. 14 that it is targetting 17 percent M2 growth next year, as it announced a series of steps to make financing more easily available.
-- That move, it said, was in line with the central bank's recently adopted 'moderately accommodative' monetary stance.
-- China has cut interest rates five times since mid-September after shifting its focus from preventing economic overheating to safeguarding economic growth as the global credit crisis deepens. [China should have never shifted its focus. Overheating (inflation) remains the greatest risk.]
-- The central bank has also lowered banks' reserve requirements four times.

-- China has abandoned its full-year lending quota limit, which the central bank implemented strictly in the first half.
-- Economists expect further cuts in interest rates and reserve requirements as policy makers strive to shield the economy from the impact of the financial meltdown, which has caused a contraction in exports.

My reaction: What a surprise! (sarcasm) With all of China's recent measures to spur growth, its record trade surpluses, and all the pentup inflation due to its currency sterilization, I really don't see why China's money supply would be growing!

Here is a graph of Chinese Money Supply Growth I made with excel.

Does it look like China is headed towards deflation to you?

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