Late last week, the People’s Bank of China published the latest set of monetary statistics, which, I think, surprises on the downside.
M2 Money supply grew by 14.7% compared to a year earlier to RMB77.29 trillion, lower than the expected growth of 15.8%. Money supply growth has fallen further below the pre-crisis average level of 16.76%. M1 Money supply grew by 11.6% yoy to RMB27.06 trillion, and currency in circulation grew by 14.33%.
New Chinese Yuan loans in July amounted to RMB492.6 billion, which is also well below the expected RMB550 billion, and well below new loans in June. Total deposits in July amounted to RMB78.57 trillion, up 16.1% compared to a year ago. Chinese Yuan deposits amounted to RMB77.97 trillion, rising 16.3% compared to a year ago, but have fallen by RMB668.7 billion. In particular, households deposits have fallen by RMB665.6 billion.
On the whole, it seems the effect monetary tightening since late last year is getting much more apparent in terms of money aggregates. Certainly we know that the Chinese economy has slowed, but not much. To contain inflation, I still believe that further monetary tightening is warranted (say targeting M2 money supply growth at low double-digit rate).
But we can see that the policy makers in China are already showing some reluctance to tighten further due to the growth concern. If policy-makers stop here, I believe that the Chinese economy will avoid the so-called hard-landing, not because they have successfully engineered a soft-landing, but because the economy has not slowed down enough. Inflation is expected to fall in the later part of this year, but it is unlikely to meet the full-year target of 4%.
Of course, the uncertain global macro picture will make policy makers even more cautious. If the global economic outlook deteriorates markedly in the near future, there will be risks that the Chinese economy will hard-land, not because of over-tightening, but because of the collapse outside.