January money and credit numbers were strong, reinforcing the positive view here of near-term economic prospects.

The stock of total social financing (TSF, i.e. funds raised by households and non-financial enterprises, including government organisations) rose by 2.5% (not seasonally adjusted) in January alone, pushing annual growth up to 13.3%, the fastest since February last year. Within this, RMB bank lending increased by 2.7%, boosting annual growth to 14.9%, the fastest since February 2013.

The recent turnaround in credit trends is highlighted by six-month rates of change adjusted for inflation and seasonal factors. Six-month growth of real TSF has almost doubled from a low in August – see first chart.

TSF has been boosted by companies raising domestic finance to pay off external US dollar-denominated debt, but this cannot explain the extent of recent strength. According to the latest official data, external liabilities of non-bank enterprises fell by $35 billion during the third quarter of 2015. Repayments have probably increased more recently but even a $100 billion reduction over the last six months would be equivalent to only 0.5% of the stock of TSF.

TSF, moreover, has been subject to a simultaneous downward distortion from the local government debt swap programme, under which governments issue bonds to allow their related financing vehicles to repay bank and other debt. The bonds are not included in TSF but the debt of the financing vehicles is. The reduction in TSF growth due to the swap programme is probably larger than the boost from companies swapping external for domestic debt.

Annual growth of the official M1 narrow money measure increased from 15.2% in December to 18.6% in January, mostly reflecting the earlier timing of the New Year holiday this year – the annual rise in currency in circulation surged from 4.9% to 15.1%. Annual growth of the broader M2 aggregate firmed from 13.3% to 14.0%, above an expected 13% target for 2016.

The preferred money measure here for forecasting purposes is true M1, i.e. currency in circulation plus demand deposits of households and enterprises (official M1 excludes household deposits). A January figure is not yet available but the strength of the official measure suggests that six-month growth of real true M1 rose further, consistent with an expected recovery in economic momentum extending through the late summer, at least – second chart.

Money / credit buoyancy casts doubt on widespread expectations of further monetary policy easing, especially with the authorities reemphasising their commitment to a stable exchange rate. Reserve requirements, however, could be cut again as part of liquidity management operations to sterilise foreign exchange intervention – a neutralising measure rather than an easing.

Today’s Chinese numbers indicate that six-month growth of real narrow money remained stronger in the emerging E7 than the G7 in January – historically a favourable signal for emerging market relative equity performance.