Eventually, money supply growth of 15-20% will catch up with you
China Daily on the impact of the increased use of non-bank financial instruments in China, a byproduct of China’s growing capital markets:
Growth rate of M2, a broad measure of money supply, edged down to 17.1 percent in April 2007, while M3, which includes M2, deposits in non-bank financial institutions and securities issued by financial institutions, picked up to 19.2 percent year-on-year. “The M3 growth rate has been faster than that of M2 since the second quarter of 2006, likely reflecting the fast accumulation of capital-market-related financial assets,” said Liang Hong, chief China economist with Goldman Sachs Asia.
Figures from the bank show that bonds issued to non-financial institutions grew 30 percent year-on-year in April and non-M2 deposits by other financial institutions soared 63 percent over the same period of last year.
In the past, M2 and M3 are used to maintain similar growth speeds due to relatively small changes in non-M2 liabilities in the country, said Liang, who believed a broader money supply measure like M3 would be a more useful parameter to assess the extent of monetary expansion and to forecast the demand, given the rapid growth in capital markets. Since the M3 growth has been hovering over 19 percent year-on-year in recent months, she expected the economy would continue to speed up and inflation might intensify in the near term.
The target M2 growth for 2007 was 16%, and of course that has been exceeded. We have reported for several years now the issues raised by money supply growth in the 15-20% (and sometimes over 20%) range. In the past, it appears that China’s low wages and the relatively high productivity of its cutting edge factories have helped repeal the laws of monetary economics; now perhaps some of the impact of these loose monetary policies are being at last felt, though it is to soon to know for sure. WSJ:
Growth this year has been consistently faster than expected. Now inflation, which touched 4.4% in June, also is running well above the government’s 3% target. Investment in factories and infrastructure has accelerated, increasing 25.9% in the first half, raising concerns that spending on ill-considered projects could lead to bad bank loans and other economic pain later. “China is not yet overheating, but the authorities will have to tighten more aggressively in the coming months to ensure that remains the case,” said Ben Simpfendorfer, an economist with Royal Bank of Scotland.
The government so far has moved slowly, raising interest rates — which are extremely low by most measures — by less than half a percentage point this year and allowing only a modest appreciation of the yuan. And officials have been quick to point out how ordinary Chinese are benefiting from fast growth. The latest figures show urban incomes rose 14.2%, and rural incomes 13.3%, in the first half, some of the sharpest gains seen in recent years…
China’s top priority has long been maintaining rapid economic growth in order to boost incomes and employ a rapidly urbanizing population. Its leaders, fearful of risking that growth, have preferred cautious, gradual changes in policy — a tendency accentuated by the political maneuvering before a key Communist Party meeting later this year.
The party congress, held every five years, will elevate a new generation of cadres to senior posts and set the government’s direction for coming years. Underscoring the importance of the political calculus, China’s State Council, or cabinet, said in a statement last month that any policy changes should “encourage the steady and fast development of the economy, in order to create a positive environment and conditions” for the party meeting…
China’s central bank isn’t independent, and decisions on major economic policies are taken by consensus among top leaders. While there are signs central-bank officials are worried about inflation and would like to take more steps to head off any surge in prices, political leaders have less incentive to worry about future risks. “They will give growth a chance,” said Qu Hongbin, an economist for HSBC.
We shall see how the new generation of Communist Party “cadres” and the non-independent Central Bank do in dealing with this emerging set of challenges to China’s remarkable record of non-inflationary super growth.