Updated: 2013-06-17 (China Daily) -
Policy makers hesitant about next step as money supply increases a lot
A faster-than-expected increase in money supply and soaring bank credit but modest economic growth is an equation that has left Chinese monetary policy makers puzzled and hesitant about their next step.
Any impulse to ease or tighten monetary policy at the moment may lead to irretrievably awful results as economists reveal their helplessness.
Robert E. Hall and David H. Papell wrote in their book Macroeconomics — Economic Growth, Fluctuations and Policy — that "unsound monetary policy is the chief culprit" leading to serious recession and inflation.
By the end of April, the broad money supply, or so-called M2, had exceeded 103.3 trillion yuan ($17 trillion), up by 16.1 percent from a year earlier, compared with a year-on-year growth of 15.7 percent in March, according to the central bank.
But the year‘s target for money supply increase was anchored at 13 percent, which requires an average lower-than-12 percent M2 growth rate in the final eight months of this year, meaning there will have to be relatively tightened monetary policy.
Up to the end of 2012, M2 in China was close to double the total value of the gross domestic product, higher than a world-recognized warning line of 1.5 for the M2/GDP ratio. In comparison, that ratio was only 0.32 in 1978.
Cheng Siwei, a renowned scholar in economic, financial and managerial fields and the former vice-chairman of the Standing Committee of the National People‘s Congress, warned that the excessive money supply is like "a tiger in a cage". "Once it is released, the consequences will be severe."
Cheng attributed high property prices and the recent rush to buy gold to the faster-than-expected increase in money supply. He is concerned about high inflation in the long term.
Since the year 2009, policy makers have written the annual M2 growth target into the annual government work report, which is announced by the premier at the opening of the National People‘s Congress every March.
Ji Zhihong, director of the research bureau of the People‘s Bank of China, said that for making monetary policy, the nation uses money supply as the key control tool, while also paying attention to other reference indexes including interest and exchange rates.
There has been no sign of inflation spiraling out of control so far this year. In April, consumer prices increased by 2.4 percent from a year earlier. That was slightly higher than March‘s 2.1 percent but still much lower than the year‘s target of 3.5 percent.
The flat inflation figures are taken to mean by economists that policy makers may not aggressively tighten money supply in the near future.
Because of the increase in interest rate liberalization, money supply may not be used as the main tool in deciding the whole monetary policy mixture, but there will be more of a focus on interest rates, as the US Federal Reserve and the Japanese Bank undertake currently, Ji said. "The monetary policy making process is in transition."
Money supply is dependent on monetary multipliers and base money. Base money is the total of domestic credit plus foreign exchange reserves.
When the total of social financing jumped to a historical high by 160 percent from a year earlier in January and 58.2 percent in the first quarter, fixed-asset investment growth slightly increased to 21.2 percent in January and February, and then slowed to 20.9 percent in March.
Beyond all expectations, GDP growth during January to March slowed to 7.7 percent year-on-year from 7.9 percent in the last quarter of 2012.
It was a different picture four years earlier. Growth in total social financing picked up to 114 percent in the first quarter of 2009 and 121 percent in the second quarter, from 26.6 percent in the last three months of 2008. It led to a boost in fixed asset investment, which increased 28.6 percent in the first quarter from 26.8 percent in the fourth quarter in 2008.
In the same period, the official Purchasing Managers‘ Index rose to 52.4 from 41.2, indicating a fast recovery in manufacturing production.
That provided evidence that the marginal effect of monetary easing on the economy is decreasing compared with 2009, after the global financial tsunami.
"We believe a large part of the new credit supply in the first quarter did not go into the real economy," said Zhang Zhiwei, chief economist in China at Nomura Securities Co.
It is partly because the underlying demand for investment is weak, he added.
"The overcapacity problem in the manufacturing industry has been exacerbated by aggressive policy easing in 2009 and 2012."
Liu Ligang, chief Chinese economist with the ANZ bank group, said: "Overly loose credit is likely to exacerbate overcapacity in factories. Economic growth cannot rely on monetary easing any more."