Slowdown in M2 Growth Is Positive, Yet Challenging, Says Senior PBOC Monetary Policy Manager
Song Yikang
/SOURCE : Yicai
Slowdown in M2 Growth Is Positive, Yet Challenging, Says Senior PBOC Monetary Policy Manager

(Yicai Global) July 27 -- M2 (broad money), a measure of money supply used by central banks, grew at single-digit rates for two consecutive months in May and June, financial data released by China's central bank, the People's Bank of China (PBOC), show. M2 growth hit record lows of 9.6 percent in May and 9.4 percent in June.

"M2 corresponds to the deleveraging process within the financial institutions. If the M2 growth rate is slow while the economy as well as the loans and social financing scale can maintain medium-to-high-speed growth, then the slowdown in M2 growth is an overall benign change and it helps reduce the overall social leverage," said Li Bin, deputy director of PBOC's monetary policy division, at the Wealth Management and Development Forum on July 25.

Li pointed out that the decline in M2 growth reflects the rapid contraction of commercial banks' bond investment and equity investment. But the total amount of loans and social financing still grow at a rapid pace, where financial support for the real economy remains solid.

However, due to the inter-bank changes, as well as changes in bonds and equity investments and financial innovation, the decline in M2 controllability, testability and connection with the real economy is a challenge to the central bank.

Broad money M2 can no longer reflect the full scale of "money." China's total credit was only 88 percent of M2 in 2009, but grew to 1.2 times that of M2 in 2016. In other words, 20 percent of the "money" is not within the scope of M2 statistics, said the report 'Where Is the Money: Capital Flow and Mechanism under the Framework of Prevalent Asset Management' jointly released by National Institution for Finance & Development and China Zheshang Bank.

"In recent years, especially since the financial crisis, the central bank has put forward the concept of social financing scale based on financial innovation developments and used it to measure the total amount of financing of the financial sector in the real economy. Social financing scale has become an important indicator of monetary policy," said Li, adding that it is also valuable to build new indicators that measure overall social credibility more comprehensively and accurately.

Follow Yicai Global on
Keywords: M2 , Deleverage , Bank , LOANS , FINANCING , Commercial Bank , Bond