Money supply growth fails to maintain momentum

Experts say credit slowdown in December reflects shift toward 'new financial normal'

Money supply growth remained tight in China during December with lenders extending far less credit than in November, reflecting the country's "new financial normal", experts said on Thursday.

According to data released by the People's Bank of China, the central bank, China's broad M2 money supply measure grew 12.2 percent in December, far below market expectations and down on the 13.6 percent growth in M2 recorded in 2013.

During the period Chinese lenders disbursed 697.3 billion yuan ($112.55 billion), central bank data showed on Thursday.

New yuan loans for the year rose by about 10 percent to 9.78 trillion yuan from 8.89 trillion yuan for 2013.

"The slowdown in M2 money supply has reflected - in terms of monetary operation - the restructuring of the Chinese economy, the narrowing of off-balance-sheet financing, the slowdown of expansion of the sectors that have excess capacity, and the tightening of regulations in the interbank business," said Sheng Songcheng, head of the statistics and analysis department of the PBOC.

Other features of the new financial normal include the decrease in funds outstanding for foreign exchange, the narrowing of the ratio of current account surplus to GDP, and changes in the central bank's ways of injecting money into the market, Sheng said.

As of Dec 31, funds outstanding for foreign exchange stood at 27.07 trillion yuan, an increase of 641.1 billion yuan, compared with a much larger growth of more than 2.7 trillion yuan in 2013.

The significant drop in growth of funds outstanding for foreign exchange has also changed the way that the PBOC used to inject base money into the market by soaking up foreign exchange liquidity, putting huge downward pressure for the growth of money supply. It is one of the main reasons for the slowdown in M2 growth last year, he said.

Hua Changchun, a China economist at Nomura Holdings Inc in Hong Kong, said in a research note: "The weak money growth data reaffirms the signal from the PMIs and ordinary imports that China's domestic demand remained weak in December.

"However, we also see tentative signs of the effects of policy easing such as benchmark rate cuts and easing of the loan-to-deposit ratio rule as credit growth improved."

With economic growth continuing to slow, the PBOC cut interest rates for the first time in two years in November.

Hua said foreign exchange reserves fell to $3.84 trillion by the end of December from $3.89 trillion at the end of September, which suggests mild capital outflows.

The PBOC data also showed that total social financing, a broad measure of liquidity designed to capture some lending outside of traditional banking, hit 16.46 trillion yuan last year and was down from the 17.29 trillion yuan recorded in 2013.

In December, total social financing jumped to 1.69 trillion yuan, compared with 1.15 trillion for November. Outstanding yuan loans increased by 13.6 percent at the end of December, compared with 13.4 percent at the end of November.

Zhu Haibin, chief China economist at JPMorgan Chase & Co, said: "Overall, the December credit data continued to suggest a shift towards more accommodative credit policy. Despite the weaker-than-expected loan figure, the fact that medium and long-term loans accounted for almost all the loan increase, the pickup in non-bank financing, and the easing in loan-to-deposit ratio calculation suggest that policymakers are encouraging bank lending to support the real economy."

Zhu expects the PBOC to adopt a mixture of traditional and new policy instruments in 2015, forecasting new loans to increase to 11 trillion yuan, or 13.5 percent, in 2015 and total social financing to hit 17 trillion yuan, or 13 percent growth.

jiangxueqing@chinadaily.com.cn