(Yicai Global) Oct. 31 -- The wide discrepancy between social financing and broadly measured money supply (M2) growth in recent weeks is the product of financial deleveraging, said Sheng Songcheng, a counselor at the People’s Bank of China (PBOC), China’s central bank. China is making headway with the financial deleveraging campaign, so the gap between social financing and M2 growth will continue to narrow, and M2 increase may return to the two-digit territory next year.
The widening gap between social financing and M2 growth figures has sparked widespread concerns and heated debate across the country, opined Sheng in a recent article published on China Finance.
As of the end of last month, China’s social financing totaled CNY17.123 billion (USD2.5 billion), up 13 percent on the year, which is 0.5 percentage point faster compared with the same period of last year, data from PBOC show. Broad money supply grew by 9.2 percent annually to CNY16.557 billion over the same period, down 2.3 percentage points on the year.
This month saw widening discrepancy between the movements of social financing and M2 figures. The former grew 3.8 percentage points faster than the latter in September, compared with the one percentage point recorded for September 2016.
Social financing and M2 are the two sides of the same coin, Sheng explained, but a quantitative equivalence cannot be established between the two indicators due to differences in statistical methods, data used and formation mechanisms.
In other words, social financing measures the support that the financial sector provides for the real economy from the perspective of financial institutions (lenders) and financial product issuers. By contrast, M2 is an indication of financial institutions’ borrowings and by extension the total amount of liquidity and buying power offered by the financial system for the real economy. The latter measures the total financing demand in the society.
Historical data suggest that the two are highly relevant to each other and move in lockstep most of the time. The widening gap between social financing and M2 growth is the result of tightening financial regulation and deleveraging.
A drop in money suppliers’ lending to other financial institutions from January through September led to a slip of 5.8 percentage points in M2 growth year-on-year, Sheng added. However, as financial deleveraging deepens, the gap between social financing and M2 growth will continue to narrow, and M2 growth may return to the two-digit territory next year.