By Fan Jianjun, Department of Macroeconomic Research

Research Report No. 141, 2016 (Total 5024) 2016-10-31

Abstract: Recently, the problem of "scissors differential" between M1’s and M2’s growth rate has attracted widespread concern. This paper thinks that the fast growth of M1 is mainly due to the excessive issuance of government bonds and corporate credit bonds last year, leading to the increase of current deposits, which is the major reason for the expansion of "scissors differential" between M1’s and M2’s growth rate. The significant decrease of M2’s growth is because of the continued decline of RMB loans growth rate, the continued negative growth of funds outstanding for foreign exchange and a large circulation of interbank deposits. Given the fact that M2 growth index has lost its proper policy reference value, it is suggested that the management team should focus more on how to keep the steady growth of "cash plus current deposits", so as to better reflect the real purchasing power of the real economy. Besides, the central bank should resort to the reduction of the required reserve ratio rather than using re-lending tools such as the medium-term lending facility (MLF) or pledged supplementary lending (PSL) when supplementing the inter-bank market monetary base currency.

Key words: "scissors differential" in monetary growth, narrow money M1, broad money M2