Hong Kong money supply

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The Hong Kong Monetary Authority published its monetary statistics for July yesterday.

Hong Kong dollar M1 money supply increased by 3.6% in July on a non-seasonally adjusted basis compared to June after a 3.7% drop in June. On a seasonally adjusted basis, Hong Kong dollar M1 money supply rose by 4.2% in July. Hong Kong dollar M2 money supply increased by 2.1% in July after falling for two months. Hong Kong dollar M3 increased by 2.0%.

On an year-on-year basis, Hong Kong dollar M1 money supply increased by 15.4% (vs. 12.5% increase in June), M2 increased by 9.4% (vs. 8.4% increase in June), and M3 increased by 9.3% (vs. 8.3% increase in June).

Total deposits increased by 2.0% in July vs. 0.9% contraction in July. Total Hong Kong dollar deposits increased by 2.1% in July, while foreign currency deposits increased by 1.9%. Also note that Renminbi deposits increased by 3.4% in July.

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The trend of slower growth in money supply remains in place. Although liquidity is not going away en masse, it is certainly not coming in en masse either, and that has been the story pretty much since the end of last year. On the whole, it is largely stable in my view. The recent market turmoil may cause (or be caused by) money outflow from the banking system, although we will have to wait for another month to see the impact.

With another round quantitative easing by the Federal Reserve possibly on the table again, one naturally assumes that there will be another flush of money into the system, but I have been taking issue with that simplistic view. It has become clear that the expectation of the last round of quantitative easing caused significant easing in the monetary condition in Hong Kong, while continuous monetary tightening from China has countered the impact of quantitative easing. It is true that the PBOC has paused tightening for a while until a recent unusual move to include margin deposits in to the reserve requirement, and it will be interesting to see what PBOC will do in the light of out of control inflation as well as potentially more easing from the Fed. Another factor that can drive liquidity away is any deterioration of the European debt crisis, which is judged here as highly probable.