Chinese money / credit statistics for November provide further evidence that policy easing is working, suggesting better economic news in early 2016.

Annual growth of the broader M2 money measure rose from 13.5% in October to 13.7% in November, the fastest since June 2014 – see chart. The solid level of growth, admittedly, partly reflects a rapid increase in financial deposits that may have limited implication for economic prospects. However, the annual increase in M2 excluding such deposits has also recovered significantly since early 2015.

Narrow money trends are more striking, with annual M1 growth surging to 15.7% in November, the fastest since December 2010. The preferred narrow aggregate here is “true M1”, which adds household demand deposits to the official M1 measure (comprising currency in circulation and corporate demand deposits). A November reading for true M1 is not yet available but annual growth was similar to that of the official measure in October and is likely to have risen further last month.

A claim has been made that the M1 surge is attributable to a temporary rise in demand deposits of local government financing vehicles. While this may have been a contributory factor, demand deposits of non-financial enterprises and households have accelerated strongly recently, suggesting that most of the pick-up is a genuine response to policy easing – see previous post.

Annual growth of the stock of “aggregate financing to the real economy” (i.e. bank loans and other forms of domestic fund-raising by households, non-financial enterprises and government organisations) eased to an estimated 12.2% in November from 12.5% at the end of the third quarter*. Financing growth, however, has been broadly stable over the past six months, having fallen significantly over 2013-14. The “credit impulse”, in other words, is no longer negative.

Within aggregate financing, annual growth of RMB bank loans was an estimated 13.9% in November and has also moved sideways in recent months. Rising money growth with stabilising credit expansion is usually a signal of improving economic prospects.

In other Chinese news, the annual rate of change in motor vehicle production rose to 17.7% in November, the fastest since December 2013, following the cut in the sales tax on smaller-engined cars in October. Vehicle production is a component of the OECD’s Chinese leading indicator.

*Official numbers available only for end-quarters; other months estimated from flow data.

As previously discussed, Chinese monetary trends suggest that economic growth has bottomed and will pick up significantly from end-2015. The OECD’s Chinese leading indicator supports this scenario.

The OECD presents its country leading indicators in “ratio to trend” form, i.e. a stable value indicates that an economy will grow at its trend pace. Its latest release refers to “tentative signs of stabilisation” in China. This somewhat underplays the positive signal because 1) Chinese trend growth is high so a return to this rate of expansion would represent a significant strengthening and 2) the ratio to trend indicator actually rose, rather than remained stable, in October, the latest month.

While the OECD prefers the ratio to trend presentation, it also calculates a leading indicator of the level of Chinese industrial output. The chart compares six-month and rescaled one-month changes in this indicator with the six-month change in output. The six-month indicator change has been firming gently since early 2015, while the one-month rise in October was the largest for two years.

The leading indicator comprises six components: production of chemical fertilizer, crude steel, buildings and motor vehicles, overseas orders from the PBoC’s quarterly survey of industrial enterprises and Shanghai stock exchange turnover value. The recent pick-up appears mainly to reflect stronger steel and vehicle production, along with a recovery in stock market turnover. Since the components are non-monetary, the positive signal is independent of better money / credit trends.

The stabilisation / recovery in the ratio to trend indicator suggests that annual industrial output growth will rise to about 8%, the OECD’s current estimate of trend. This compares with 5.6% in October, with a November number due shortly. One caveat: the OECD revises its leading indicators monthly, so another month or two of data are needed to confirm a change of direction.