China’s M2 Surge and the Stealth Stimulus

The explosive surge of China’s M2

From WantChinatimes.com

Data released by the People's Bank of China reveals that China's broad money supply grew by 15.7% in March, boosting the outstanding M2 to 103 trillion yuan (US$16.5 billion).

Analysts are worried that the rapid surge in M2 is unhealthy for the economy and that the authorities should check the money supply and cut down the ratio of currency to GDP, according to the state newswire Xinhua.

M2 is a measure of money supply that includes coins, currency, checking account balances, savings and short-value time deposits. With more than 100 trillion yuan (US$16 trillion) circulating in the market, analysts believe it is fueling inflation.

M2 climbed from 13 trillion yuan (US$2 trillion) in 2000 to nearly 50 trillion yuan (US$8 trillion) in 2008, and to 97.4 trillion yuan (US$15.6 trillion) or 190% of the nation's GDP in 2012, the central bank data showed.

 New regime, more intrepid interventions

In perspective, the article says that China’s M2 has grown an average of 53.25% or 17.26% CAGR since 2000 and 21% or 15.55% CAGR since 2008. This can partly be seen from the 1 year year-on-year change of China’s M2. (Chart from Bloomberg)  

The CAGR growth rate represents almost double the rate of China’s economic growth. 

Such pick up in the pace of M2 simply means that Chinese authorities have been using the printing press to camouflage on the liquidation pressures from her bubble plagued economy. 

Yet this also shows how Chinese authorities have already engaged in stealth or publicly undeclared ‘bold’ stimulus, most of which I suspect have been channeled through State Owned Enterprises (SoE).

From the Bloomberg

New local-currency lending in March was 1.06 trillion yuan ($171 billion), the People’s Bank of China said today in Beijing. That compares with the 900 billion yuan median estimate in a Bloomberg News survey of 34 economists and 620 billion yuan in February…

China’s foreign exchange reserves rose to a record $3.44 trillion at the end of March from $3.31 trillion in December. The median estimate in a Bloomberg survey was for $3.36 trillion.

For the first quarter, aggregate financing surged about 58 percent from a year earlier to 6.16 trillion yuan, according to central bank data. New local-currency loans in the first three months were 2.76 trillion yuan, the most for a first quarter since the global financial crisis, and 12 percent higher than the same period last year.

Note of the diminishing returns from China’s printing press: statistical economic growth has been in a decline despite the increasingly aggressive use of monetary tools. (chart from tradingeconomics.com) 

China’s statistical economic growth was reportedly significantly lower at 7.7%, during the first quarter in 2013, than the what the consensus expected.

The surge in M2 via record financing has marginally impacted price inflation rates. This comes in the face of China’s attempt to curtail property bubbles via piecemeal approach through regulations (e.g. 20% tax on new homes regulations)

So while authorities have been pumping money briskly on one hand, they are trying to suppress bubbles on the other hand. Such conflict in policies signifies as the proverbial left hand doesn’t know what the right hand is doing.

Again this demonstrates of the ongoing stresses or frictions from bubble liquidations within the economy running in conflict with China’s bold recourse towards inflationism as shield to an economic meltdown (chart from Danske)

The Shanghai index, China’s major equity benchmark continues to exhibit pressures from the downdraft of bubble liquidation pressures in spite of the stealth stimulus.

Perhaps the China story may have partly contributed to the recent rout in commodities. But I guess this should be short lived as all major governments will embark to drastically shore up statistical economy via the printing press.

We are either going to see a bubble bust (crisis) or stagflation or combination perhaps sooner than later.