Tag Archives: money supply

Loads a Money!

12 Jan

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

Zai Jian

Don’t expect a rate hike

3 May

Over the weekend the PBoC raised the bank’s reserve requirement ratio (RRR) by 50bp.  This is likely to remove about RMB250b from the banks.  The question is, why make such a move?

A priori it makes no sense as the government controls the loan supply by setting targets – a target of RMB 7.5tn was set for 2010 for example.  In fact over the past few weeks both short-term rates and long-term yields have been heading south, the result of adequate supply and limited demand for credit.  In other words this RRR increase is not a tightening measure, but simply the equivalent of issuing in central bank bonds at a lower rate (i.e. the deposit rate for required reserves is 1.62%, while the 1 year bills are about 1.93%).  But we still haven’t directly answered the question as to why the RRR was raised.

Well, it looks like the PBoC’s move was intended to manage market expectations of an imminent rate rise.  In recent weeks hot money has flowed into China, and foreign currency in the country has been exchanged to RMB on the assumption that the currency would appreciate.  Such FX flows in combination with tightened demand for credit reduced rates at the near end of the curve.  By raising the RRR the PBoC is trying to support short-term rates, which means that the banks itself does not intend an imminent rate rise.

A number of my readers have commented that they would like a beginner’s explanation of some of the topics I cover in my blog.  There is a wonderful website called http://investopedia.com – a financial dictionary with tutorials and comprehensive articles.  This blog entry touches on topics including money supply, the impact of interest rates, foreign exchange.  Clicking on the link below will take you to a definition of the term “money supply”.  There are links on the page to related terms and related articles.