Beijing may ease credit curbs if trend continues Mainland money supply and bank loans grew at a slower pace last month, signalling Beijing's tighter monetary policy is having an impact. M2, a broad measure of money supply, increased 17.4 per cent to 44.31 trillion yuan (HK$50.5 trillion) from June last year, after expanding 18.1 per cent in May, the People's Bank of China said yesterday. The moderated growth might prompt Beijing to relax some controls on credit later this year, economists said. But any easing designed to help increasingly cash-starved companies would have to be balanced against continuing inflation risks. Wang Qian, an economist at JP Morgan Chase, said the slowing pace followed orders to banks to set aside a record level of funds in reserves. That has cut the amount of cash they can lend out. After two increases in the so-called reserve ratio last month, lenders now have to set aside 17.5 per cent of their deposits as reserves. Compared with the modest easing in M2 growth, narrow money supply M1 growth fell to 14.2 per cent year on year last month from May's 17.9 per cent expansion. The increase was the slowest since June 2006. M1 is money in circulation plus demand deposits while M2 also includes time deposits. '[The drop partly reflects] the shift to time deposits from household cash and demand deposits intended for immediate investment in the stock market,' Ms Wang said. The Shanghai Composite Index has slumped 45.3 per cent so far this year. Lehman Brothers economist Sun Mingchun said the easing in M1 growth, together with slowing deposit rates in corporate accounts in the first six months of the year, might also suggest companies were short of money. Non-financial corporate deposits rose 1.625 trillion yuan in the first half. That was 27 billion yuan less than a year ago, according to the central bank. If companies appear to be facing more financial difficulties in the coming months, Beijing is expected to loosen credit curbs, according to economists. Last month, yuan loan growth rose 14.1 per cent year on year, moderating from the 14.9 per cent growth seen in May. That was the slowest pace in two years. New loan creation in the first half of the year amounted to 67.7 per cent of the full-year target, slightly higher than what the central bank expected at the beginning of this year. 'In the near term, the central bank is likely to continue with the focus on liquidity management in the banking system,' said Ms Wang. 'Going forward, however, steady easing in inflation, combined with rising concerns of slowing external demand, would likely prompt policymakers to consider relaxing control on credit expansion.' China's top leaders are increasingly concerned that rising costs at companies, the US dollar's depreciation and tight credit controls will tip the economy into a slump. But a looser monetary policy could provide fuel for inflation, Beijing's top economic enemy at the moment.