July’s Drop in Money Supply Is a Sign That China's Monetary Easing Wave Is About to End, Analysts Say
Duan Siyu
DATE:  Aug 12 2020
/ SOURCE:  Yicai
July’s Drop in Money Supply Is a Sign That China's Monetary Easing Wave Is About to End, Analysts Say July’s Drop in Money Supply Is a Sign That China's Monetary Easing Wave Is About to End, Analysts Say

(Yicai Global) Aug. 12 -- Key money supply indicators were lower than expected in July, showing that China’s aggregate financing, the broadest measure of the country’s credit support, is returning to pre-pandemic levels, a number of experts told Yicai Global.

Last month’s slowdown in credit expansion indicates that the central bank is shifting from quantitative easing to structural optimization and will put greater emphasis on more targeted monetary policy, said Wen Bin, chief researcher at China Minsheng Bank.

The slowdown in credit expansion in July reflects the central bank's policy of 'appropriate aggregate financing' is beginning to come into play, said Wang Qing, chief macro analyst at Golden Credit Rating International.

China’s banks lent out an additional CNY992.7 billion (USD142.8 billion) worth of yuan-denominated loans last month, almost half the CNY1.81 trillion (USD260.3 billion) issued in June, according to data released by the People’s Bank of China yesterday. Total social financing came to CNY1.69 trillion, less than half June’s CNY3.43 trillion.

For the first time since February, M2 broad money supply growth contracted. July saw M2 money supply rise by 10.7 percent year on year, 0.4 percentage points less than in June, the NBS said.

Meanwhile, M1 money supply, which referring to most liquid forms of money such as cash and current bank deposits, had its highest reading since May 2018, at 6.9 percent growth. This could suggest an increased level of capital utilization among the businesses, enabling a sustained recovery, Wen added.

July’s pullback exceeded analysts’ expectations. Twenty-six chief economists polled by Yicai Global expected M2 money supply to grow by 11.12 percent from a year earlier and total social financing to be at CNY2.01 trillion. However, they anticipated fewer new yuan loans at CNY1.26 trillion.

July’s figures were still significantly higher than the same period last year and single-month data fluctuation is normal, said Zhou Maohua, an analyst at China Everbright Bank's financial market division. Therefore, this is unlikely to trigger any further monetary easing.

Should there be no more upsets in the external environment, monetary policy should return to where it was in February before the outbreak, Wang said. The growth rates of credit, social financing and M2 will all continue to decline, and monetary policy will make use of more direct instruments, he added.

With the exception of non-bank loans, new yuan loans in July were still higher than a year earlier, indicating credit support for the real economy has not weakened significantly, Wang said.

The remaining quotas of CNY7.5 trillion of social financing and CNY7 trillion of new credit over the last five months will continue to provide powerful support to keeping business alive and ensuring employment, Wen said. Altogether, there is CNY30 trillion of social financing and CNY20 trillion of new credit allocated for this year.

Government and corporate bond financing are expected to provide some support to the new social financing in August, Wang said. However, there is only a small chance that social financing will continue to grow and a slight decline cannot be ruled out, he added. M2 growth in August is expected to rebound slightly.

Editors: Tang Shihua, Kim Taylor

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Keywords:   M2,Social Financing,Yuan Loan,Economic Data,Monetary Policy,PBOC