Money supply and forex shoot up

PUBLISHED : Wednesday, 13 July, 2011, 12:00am
UPDATED : Wednesday, 13 July, 2011, 12:00am


Growth of money supply on the mainland - or the total amount of cash in the economy - beat market expectations last month, and foreign exchange reserves ballooned to a record high.

Mainland banks extended 633.9 billion yuan (HK$762.21 billion) of loans last month - an increase of 14.9 per cent from May.

And broad money growth, or M2 - which includes cash and most deposits and is an indication of the amount of money in circulation - rose to a three-month high of 15.9 per cent from a year ago.

The data comes after inflation hit a three-year high last month, with the consumer price index up 6.4 per cent. It has Beijing caught between trying to tame runaway prices and maintain economic growth, analysts say.

The lending and M2 growth surprised some market watchers, while others saw it as a sign of loosening credit. But Qu Hongbin, HSBC's chief economist for China, said it could be a temporary spike as banks rushed to boost their figures at the end of the quarter. He said he expected inflation to ease from next month.

'There is no need to worry about a hard landing in China,' Qu said, but noted that gross domestic product growth was likely to slow to 8.5 to 8.95 per cent in the second half. He said infrastructure projects, public housing and robust consumer spending would support growth.

Loans from banks are just one financing channel on the mainland. Of the 14.27 trillion yuan of new credit extended last year, about 41.5 per cent came from other, non-bank channels, figures from the People's Bank of China show.

'It's difficult to make a judgment based on one month of lending data from the banks. The broad deceleration of loan growth continues,' Li Cui, the chief economist for China with RBS, said. 'We also need to watch the development of other forms of bank financing such as the growth in off-balance-sheet loans, for which we don't yet have the data.'

China's foreign exchange reserves ballooned to more than US$3.197 trillion at the end of the second quarter, up 30.3 per cent compared with last year. That will stoke inflationary pressure, analysts say.

The reserves rose US$153 billion from the previous quarter, down from the increases of US$195 billion to US$200 billion recorded in each of the previous three quarters.

Even so, said Michael Werner, an analyst at Sanford C. Bernstein, with annualised growth of 22 per cent the foreign exchange reserves were still expanding at a rapid rate.

Foreign exchange growth had been fuelled by a rise in the trade surplus, an inflow of foreign direct investment as well as hot money, said Liu Ligang, the head of economics for China at ANZ Bank.

Lu Zhengwei, chief economist at Industrial Bank, said 700 billion yuan of M2 growth was 'unexplainable'.


This is Beijing's current growth target for M2, or the broad measure of money supply