Slower Growth the ‘New Normal’

Analysts predict that slower growth in China’s money supply will become in- creasingly common amid the country’s deleveraging efforts.

The M2, a broad measure of money supply that covers cash in both circulation and de- posits, rose 8.2 percent to 167.68 trillion yuan ($26 trillion) at the end of 2017, according to data released by the People’s Bank of China, the country’s central bank, on January 12.

Growth dropped from 11.3 percent at the end of 2016, bidding farewell to the double digit growth rates seen consistently over the previ- ous 20-plus years.

“Amid the deleveraging process and tougher financial regulations, the slower growth in M2 indicates that the capital uses by commercial banks have become better regulated with less funds circulating inside the fi nancial sector and less derivative depos- its,” said Ruan Jianhong, head of the central bank’s survey and statistics division, adding that current monetary conditions and sound economic performance provided a good op- portunity for further deleveraging.

In 2017, new yuan-denominated loans totaled 13.53 trillion yuan ($2.1 trillion), which was 878 billion yuan ($136.57 billion) more than that of the previous year.

Worth noting is that new loans in December stood at 584.4 billion yuan ($90.9 billion), much lower than market expectations. It’s not be- cause monetary demand from the economy suddenly dropped at the end of the year, but is in fact a rational slowdown following fast expan- sion in previous months, which is benefi cial for fi nancial institutions to maintain prudent opera- tion and lower systematic risks, and should have no significant impact on the real economy, Ruan said.

The sudden slowdown in M2 growth can be partly attributed to new regulations, according to China International Capital Corp. (CICC). In November 2017, Chinese regulators released draft guidelines that look to unify rules covering asset management products issued by all types of fi nancial institutions in order to curb fi nancial risks and reduce lever- age ratio.

The guidelines require fi nancial institutions to set leverage ceilings on asset management products.

There will be a transition period that will last until June 30, 2019, during which fi nancial insti- tutions should not expand the scale of products that do not comply with the guidelines.

“In the future, slower M2 growth than before will become the ‘new normal,’ as the country’s deleveraging process deepens and the fi nancial sector gets back to the function of serving the economy,” Ruan said.

She added that factors affecting money supply have become more complicated than before due to market developments and financial innovations, so the M2 figure is less predictable, less controllable and less relevant to economic activities.

“Thus there is no need to be overly con- cerned by or to over interpret the change in pace,” Ruan said. “The central bank will contin- ue to implement prudent and neutral monetary policy, control the level of overall money sup- ply and maintain reasonable growth in credit and social financing to hold the liquidity level steady.”

China will also strengthen supervision, adjust the “intensity and tempo” of policies to stabilize market expectations, and create a neu- tral and moderate monetary environment for supply-side structural reforms and high-quality development, she added.

The CICC maintains its forecast that monetary policy may move toward the tight end.