Measures begin to curb money supply

PUBLISHED : Tuesday, 11 July, 2006, 12:00am
UPDATED : Tuesday, 11 July, 2006, 12:00am

Latest data indicate growth in credit, investment is slowing

Mainland money supply growth eased last month for the first time this year in a sign that the central government's campaign to head off rising credit and investment activity is working.

Growth in M2 money supply, a broad measure that includes cash in circulation and all deposits, slowed to 18.4 per cent year on year from 19.1 per cent at the end of May, the official China Securities Journal reported in a front-page story yesterday.

The newspaper said year-on-year growth in M1 money supply, a narrower measure covering cash in circulation and the demand deposits of enterprises, also slowed last month, coming in at 13.9 per cent, down from 14 per cent at the end of May.

Economists said the news would give the People's Bank of China some breathing space before having to look at further tightening measures.

'We were looking for a slower number [18.9 per cent], but this growth number is lower than ours and the markets' expectations. It suggests that the PBOC is regaining control over money supply growth,' said Stephen Green, a senior economist with Standard Chartered Bank.

'One of the most important keys to M2 is bank loan growth, and here the PBOC is finally having some success in reining back the banks.'

Tim Condon, an economist with ING's Asian research unit, said the recent rise in lending interest rates and restrictions on real estate lending had contributed to a slowdown in broad money supply growth last month.

'The slower growth in the monetary aggregates would reduce overheating concerns,' Mr Condon said.

Enoch Fung, an economist with Goldman Sachs, said in a research note that the government's macroeconomic tightening measures should lead to a more notable moderation in money and credit growth in coming months.

However, Mr Green said it was far too early to declare victory in the fight to control liquidity, and he believed further increases in banks' reserve requirements would be necessary.

The central bank's full-year target for M2 money supply growth is 16 per cent. China Securities Journal said credit continued to expand at a fast pace last month, with new bank loans rising to 360 billion yuan compared with 209.4 billion yuan in May. New loans extended in the first six months of the year amounted to 2.14 trillion yuan, or 85.7 per cent of the central bank's projected total of 2.5 trillion yuan for the whole year.

The newspaper and economists noted that credit activity was traditionally greater in March, June, September and December, the last month of each quarter, and new bank loans in June were 102.7 billion yuan less than in the same month last year, suggesting a credit slowdown. The central bank raised benchmark lending rates by 27 basis points at the end of April and lifted the reserve requirement ratio for commercial banks by half a point last month.

Meanwhile, the 21st Century Business Herald yesterday quoted Yang Weimin, deputy secretary general of the National Development and Reform Commission, saying the government would implement further tightening measures if future data showed an acceleration in economic growth in the second quarter after the first quarter's 10.3 per cent growth rate.