(Yicai) June 16 -- China's M1 money supply growth rate accelerated to a three-month high in May, marking its 17th consecutive month of positive year-on-year growth. As the comparison base levels rise in the coming months, M1 growth could face increasing downward pressure, analysts said.

M1, which was redefined by the People’s Bank of China in January 2025 to include cash in circulation, corporate current deposits, personal current deposits and reserve funds held by non-bank payment institutions, has logged positive growth for 17 consecutive months and the May reading was the highest in three months, according to the latest data from the central bank.

The strong recovery in M1 directly reflects easing pressure from idle funds, a higher share of short-term transactional funds, and a continued increase in "active money" circulating in the economy, signaling ongoing recovery in domestic demand, analysts said.

The improvement may partly be due to the low base effect, said Zhong Linnan, senior macro analyst at GF Securities. In the same period last year, the M1 balance tumbled by CNY226 billion (USD33.4 billion), making it the second-lowest May reading since 2021. In addition, household funds are likely to become more active, as both the number of new mainland stock trading accounts and the shares of newly established equity-focused funds showed year-on-year improvement last month.

Optimizing the credit structure is an important supporting factor, said Wen Bin, chief economist at China Minsheng Bank. Loan issuance in May was stronger than in April, leading to stronger deposit creation. In particular, short-term corporate loans and bill financing remained robust, resulting in increased corporate current-account balances at month-end, which supported M1 growth. The M2-M1 spread stood at 3.1 percentage points, remaining at a relatively low level by recent standards, indicating that the trend of increasing money circulation is still ongoing.

Fiscal efforts to address local government debt were another key driver of the latest M1 recovery, said Wang Qing, chief macroeconomic analyst at Golden Credit Rating International. The issuance of special bonds used to replace hidden local government debt increased significantly year-on-year in May. A considerable portion of these funds will be converted into current deposits held by local government financing vehicles, temporarily boosting M1 growth.

Changes in market asset allocation behavior further reinforced the "active money" effect, reflecting greater circulation of funds in the economy. A research report by China International Capital Corp. noted that the increase in M1 in May highlights the trend of deposits becoming more liquid and shifting toward the capital markets. Non-bank deposits increased by CNY1.1 trillion (USD162.7 billion) in May from the previous month, while year-on-year growth remained basically stable.

Cross-border capital flows also provided important external support for the M1 recovery, Zhong said. The surplus in foreign exchange settlement and sales, supported by China's large trade surplus and a strengthening Chinese yuan, could further increase from the year before, providing the corporate sector with more current deposits.

Future Trajectory

The M1 indicator has experienced significant fluctuations in recent years due to base effects and may face downward pressure in the future because of these comparisons, said Yu Bo, chief macro analyst at Changjiang Securities.

The future trajectory of M1 growth will be influenced by two opposing forces, Yu said. On one hand, the ongoing shift of household deposits into investments during the low-interest-rate era may continue and a strengthening yuan could encourage further foreign exchange conversion by firms. Additionally, potential fiscal stimulus and debt-restructuring measures may provide liquidity support. On the other hand, the M1 comparison base will continue to rise until September before potentially easing, creating downward pressure on growth in the coming months.

As the base levels for both M1 and M2 gradually rise in the coming months, their growth rates may slow slightly, Wen said.

As for the sustainability of M1 recovery, the key factor depends on the overall improvement of domestic demand fundamentals, said Li Chao, chief economist at Zheshang Securities. Whether M1 growth can be sustained depends on whether fiscal spending, corporate profit recovery, household income expectations and property sales can align to drive stronger growth.

Editor: Kim Taylor