China moves to tighten monetary policy

by Shaun Richards

This morning has brought something which raised a bit of a wry smile. It came from the People’s Bank of China and the emphasis is mine.

At the end of March, the balance of broad money (M2) was 227.65 trillion yuan, a year-on-year increase of 9.4%, and the growth rate was 0.7 percentage points lower than the end of the previous month and the same period last year; the balance of narrow money (M1) was 61.61 trillion yuan, a year-on-year increase of 7.1%. The growth rate was 0.3 percentage points lower than the end of the previous month and 2.1 percentage points higher than the same period last year;

It was the case for many years that China had faster money supply growth than the West. But as you can see it is a fair bit lower now as for example the latest broad money growth in the Euro area is shown below.

Annual growth rate of broad monetary aggregate M3 decreased to 12.3% in February 2021 from 12.5% in January.

There are various contexts here and the first is the 3% difference in broad money growth rate. This matters in terms of monetarist theory because it leads into growth in nominal economic output or GDP with a lag of 18-24 months. So either the Euro area is going to grow faster than China or we will see an inflationary push. These days the inflationary push tends to turn up in asset prices such as house prices rather than consumer inflation especially in the Euro area where its measure ignores owner-occupied housing.

Also narrow money is growing more slowly than broad money which would put most Western central bankers into quite a spin. The gap between China and the Euro area is even more pronounced here.

Annual growth rate of narrower monetary aggregate M1, comprising currency in circulation and overnight deposits, stood at 16.4% in February, compared with 16.5% in January.

So a difference in annual growth rate of a bit over 9%.

What are economic prospects?

The South China Morning Post pointed out this last week.

China’s economic growth rate for this year has been raised by the International Monetary Fund (IMF), which believes a way out of the unprecedented coronavirus crisis is becoming “increasingly visible” around the world.

The Washington-based organisation on Tuesday raised China’s economic growth estimate for 2021 to 8.4 per cent, 0.3 percentage points higher than in its January prediction,  with the 2020 estimate left unchanged at 5.6 per cent.

Should that turn out to be true and I am thinking in broad brush terms as the IMF is maybe having a laugh using decimal points. We see that China is expecting faster economic growth with slower money supply growth.

Time to Tighten?

Firstly let me apologise to any Western central bankers reading this next bit as it must be discombobulating. Please make sure you are sitting comfortably as we join the China Economic Review..

China’s central bank has asked lenders to rein in credit supply, as the surge of lending that sustained the country’s debt-fueled coronavirus recovery renewed concerns about asset bubbles and financial stability, reported the Financial Times.

New loan growth hit 16% in the first two months of the year. The People’s Bank of China responded in February by instructing domestic and foreign lenders operating in the country to keep new loans in the first quarter of the year at roughly the same level as last year, if not lower, according to FT sources with knowledge of the situation.

The directive could translate into a considerable drop in bank lending, the largest source of financing for the world’s second-largest economy, said the FT.

The policy mechanism of using a quantity measure is one that also differentiates China from the West or at least it did. The reason here is that Western experience was that trying to control lending in one area led to two problems. Firstly that it is a blunt instrument that tends to impact on all lending including that to the real economy and thus affects economic growth. Next that lending for property is hidden via all sorts of machinations so that we get what is called disintermediation where the official measures do not count what the officials think they do.

Thus after various failures we abandoned such policies although the new enthusiasm for macroprudential policies may mean we are back on the case soon or as The Who put it.

Meet the new boss
Same as the old boss

Those calculating the numbers are likely to need to mull this part of the lyrics as well.

Then I’ll get on my knees and pray
We don’t get fooled again
Don’t get fooled again, no, no

Another issue is that as the impacts collide and the economy slows the measures tend to get abandoned before their time.

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What is the state of play?

From the PBOC.

At the end of March, the balance of domestic and foreign currency loans was 186.44 trillion yuan, a year-on-year increase of 12.3%. The balance of RMB loans at the end of the month was 180.41 trillion yuan, a year-on-year increase of 12.6%, and the growth rate was 0.3 and 0.1 percentage points lower than the end of the previous month and the same period of the previous year, respectively.

Is Inflation on the rise?

Late last week brought news of changes as we look up the inflation chain. From the National Bureau of Statistics.

2021 March, the country’s industrial producer prices rose 4.4% , up 1.6% ; industrial producer prices rose 5.2% , up 1.8%

The area pushing this change is below.

Among them, the price of mining and quarrying industry increased by 12.3% , the price of raw material industry increased by 10.1% , and the price of processing industry increased by 3.4% .

This has led to a response this morning.

China will strengthen controls on the raw materials market to help limit costs for companies that have been pressured by a surge in commodity pricesChina National Radio reported, citing Premier Li ( @FirstSquawk)


We see that China is switching to tightening monetary policy as we mull how much ahead of us in the West it is? As we cannot raise interest-rates by much I believe that we will convert to the Chinese way when the time comes here although it still feels a long way away. Returning to the domestic issue there are consequences as we note house price growth.

On a year-on-year basis, new home prices in first-tier cities rose 4.8 percent in February, up 0.6 percentage points from January, while those in second-tier cities edged up 4.5 percent, compared with the 4.1 percent increase in January.

Resale home prices in first-tier cities grew 10.8 percent from a year earlier, expanding 1.2 percentage points from the growth in January. ( Shine)

How much will they be willing to cut growth and will they accept falling house prices to improve affordability?

According to Bloomberg the crunch is already impacting students.

Last month authorities effectively shuttered student access to the once ubiquitous online loan industry, a sprawling collection of apps, fintechs and other unregulated lenders. Internet platforms were told to stop offering online loans to students and unwind existing credit. Banks will need to seek regulatory approval before promoting such loans on campus.

The loans look not a little usurious to me.

Historically there were next to no affordability checks on short-term loans to students, where annualized rates are typically between 15% and 24%.

What could go wrong?

Well for a start this.

Zhang Chunzi, a 25-year-old who works at a foreign trade company in Hangzhou, still has 150,000 yuan of loans outstanding from a dozen platforms including Ant Group Co.’s Jiebei service.

Zhang, who lost her job in February last year due to the pandemic and only just found a new job in June, makes a monthly 6,000 yuan after-tax.

“I get calls and text messages from debt collectors almost every day,” Zhang said. Nearly all of her attempts to negotiate lower interest payments have been rejected and collection staff have even called her new employer. “It’s very scary.”



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