Over 2010 the Chinese authorities applied multiple policy tightening decisions. Nonetheless, in December M2 increases 2.19%. Over 2010 China’s M2 increased 19.7%.
This is another indication of a dynamic I’ve discussed a number of times here at the Raven and the Dragon – the battle between a central bank and a booming economy. What do I mean? Early tightening policy is usually overwhelmed by a greater incentive to lend. This leads to greater levels of restriction. This cycles, until a sudden slowdown materializes.
In China the situation is complicated by the pace of foreign reserve growth in recent months. In 2010 reserves increases 18%, but growth in 4Q10 was a massive 43% on an annualized basis.
This illustrates the difficulty China faces in breaking the link between a build-up of reserves and local monetary growth. We know that China is starting to redirect the tanker, and decrease its dependence on export driven growth. Until a certain threshold is reached, this link will not be broken. Reserves are likely to continue to grow in th ecoming quarters.
The graph below highlights the huge growth in M2
PS – Here’s a definition of M2: http://www.investopedia.com/terms/m/m2.asp