Chinese July money numbers were very disappointing, signalling that an economic recovery remains distant. More decisive monetary policy easing is urgently required but the authorities are constrained by a teetering RMB and surging food prices.

Six-month growth of narrow money dropped sharply in July, reversing a four-month improvement – see first chart. Broad money growth (not shown) was similarly weak. Broad credit expansion registered a smaller decline but had recovered by less previously.

Money / credit growth in real terms – i.e. relative to consumer prices – was additionally depressed by a rise in six-month inflation to an eight-year high, reflecting strong food prices, which were up by 9.1% in July from a year earlier. Real narrow money growth dropped back to near its late 2018 low – second chart.

Money / credit trends are weak mainly because a policy-driven fall in money market rates has not been transmitted to the wider economy. Average interest rates on banks’ enterprise loans and mortgages remained elevated in Q2, according to the PBoC’s just-released monetary policy report – third chart.

The limited pass-through may partly reflect official guidance to banks to avoid another lending splurge. In addition, the failure of Baoshang Bank in May resulted in a rise in funding costs for smaller institutions.

The authorities are relying on fiscal stimulus to boost the economy but may be forced to reopen the credit sluice gates. Such action, however, risks cratering the currency. As well as falling through 7 against the US dollar, the RMB has now breached 2017-18 lows against the official currency basket – fourth chart.