Here’s quite a glaring chart from Standard Chartered depicting M2 expansion rates from around the world:
What do StanChart’s analysts make of it? Well, they suggest it’s actually an example of the most effective monetary easing in the world. As they state (our emphasis):What word would you chose to describe China’s loan growth in H1? We have a few ideas. With June loan growth rumoured to be CNY 800-1,000bn (USD 120-150bn), that would bring us close to CNY 7trn (USD 1trn) for the first six months of the year. We are now looking at, we believe, CNY 9-10trn (USD 1.3-1.5trn) for the year. It is surely the most effective monetary easing in the world right now. Take a look at Chart 1 which shows year-on-year M2 growth around the world. While many Chinese friends ask us anxiously about the United States printing money, we wonder if those worries might not be better focused at home.
And, according to the analysts, there’s at least CNY45,000bn more of loans to be extended via the money multiplier effect if China releases the CNY 4,079bn it has in outstanding PBoC bills and lowers its reserve requirement from a relatively high 15 per cent to 7 per cent. As they explain:
…quite extraordinarily, despite all this lending, there is still a tonne of sterilised money still sitting there ready to be released in the event of any tightness appearing in the market. By end April there were CNY 8,717bn (USD 1,282bn) worth of funds still sitting in the banks’ reserves. The excess reserve ratio, we estimate, had come down to 1.6% in April 2009, but the required reserve was still at 15%, which is still high by historical standards.
Further down the liability side of the PBoC balance sheet one also finds CNY 4,079bn (USD 600bn) in outstanding PBoC bills. (That is only CNY 470bn (USD 70bn) less than at the beginning of the year. The neutral OMO effect seen in Table 1 is a result of the PBoC using repos to take some of that liquidity back). If one released all those PBoC bills and cut the RRR to 7%, one would release some CNY 9trn worth of base money, which is enough, once the money multiplier is allowed to do its work, to generate CNY 45trn (USD 6.6trn) worth of loans.
They conclude:
In other words, there is no technical reason why loan growth has to slow; the system in theory could maintain CNY 10trn loan growth this year and next. The only limit on bank lending is the fear that the words we used to title this piece will one day be used to describe China’s banking sector’s bad loans and inflationary problem.
Those words by the way were: Massive, enormous, gigantic, whopping, humongous.
Relate links:
So, China believes in a strong dollar does it? - FT Alphaville
Editorial comment: China will not save the world economy - FT
