Better Chinese monetary news
Wednesday, February 21, 2024 at 10:50AM
Simon Ward

Chinese monetary statistics for January suggest that policy easing is starting to become effective.

Six-month growth of narrow money, as measured by true M1*, rebounded from a negative December reading to its highest level since May – see chart 1.

Chart 1

Q1 numbers can be volatile because of New Year timing effects, so improvement needs to be confirmed by February / March data.

True M1 can be broken down into “private” and “public” sector components. The former aggregates currency in circulation and demand deposits of households and non-financial enterprises. The latter is calculated as a residual and is dominated by demand deposits of government departments and organisations.

Six-month growth rates of both components rose in January but the public sector increase was much larger, consistent with funds being mobilised to boost fiscal spending – chart 2.

Chart 2

Progress in implementing fiscal stimulus is also suggested by a strong rise in central government deposits – these are excluded from money definitions but deployment of funds will have a positive monetary impact.

The broader M2 measure continues to outpace narrow money, with six-month growth little changed in January, extending a recent sideways movement. In terms of the “credit counterparts”, domestic credit expansion has firmed since late 2023 but there has been an offsetting increase in non-monetary funding (“other liabilities”) – chart 3.

Chart 3

A reduction in the broad / narrow money growth gap driven by narrow acceleration is usually a positive economic signal, indicating a rise in broad money velocity.

The January narrow money recovery, as noted, partly reflects implementation of fiscal spending plans. A sustained pick-up requires monetary policy to be sufficiently accommodative. Recent developments are promising. PBoC lending to the banking system grew by a record amount in Q4. Banks’ excess reserve ratio rose to 2.1%, the highest since Q4 2020 – before the recent 0.5 pp further reduction in the requirement ratio. The reserves injection has contributed to three-month SHIBOR reversing half of its August-December rise since the start of the year – chart 4. Currency weakness has remained contained despite softer rates; indeed, the JP Morgan effective index has risen slightly year-to-date.

Chart 4

Monetary deterioration into late 2023 argues for economic weakness through H1 2024. Confirmation that monetary trends have turned would suggest improving prospects for H2.

*Official M1 plus household demand deposits. M1 conventionally includes such deposits but they are omitted from the Chinese official measure for historical reasons.

Article originally appeared on Money Moves Markets (https://moneymovesmarkets.com/).
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