Remember China’s missing M2?
Wei Li and Stephen Green at Standard Chartered began pointing out in March that China’s official measure of this type of money supply wasn’t reflecting reality, due to some accounting rule changes.
The problem being that M2 is a major PBoC monetary target. For example, Li and Green wrote that February’s M2 growth rate was really 17.4 per cent, compared to the 15.7 per cent reported rate — significant in light of the 16 per cent target.
Even in July, they say, M2 growth fell by only 0.2 per cent, rather than the 1.2 per cent reported figure. The rise in popularity of wealth management products was one of the reasons they cited.
Anyway, it looks like Green and Li have been proved right:
… the People’s Bank today came out and said that, because of the development of off balance sheet stuff, the official M2 data is ‘too low’, and that they’ll be developing a “M2+” concept which includes some of the off balance sheet stuff. It is not a massive problem, as M2 growth has significantly decelerated whichever way one looks at it, thanks to loan controls, but it is still important.
Just last week, the pair had written that wealth management products were a likely cause of an apparent fall in Chinese bank deposits in July — and not FX outflows, as some believed. Those wealth management products did not show up in the M2 count:
On a bank’s balance sheet, money that buys a WMP is treated differently from money that is put into a savings account. WMPs are in principle risky investments, and the investors, not the bank, bear potential gains/losses. The bank manages the investment or simply provides a custodian service. In contrast, deposit savings are risk-free assets for depositors; banks are obligated to return the funds in full, plus any interest. Because of this difference, when households or companies purchase WMPs, their money is reclassified and is no longer recorded under deposit saving accounts.
It’s not clear how the WMP funds should then then treated. They add:
In practice, we think that if a bank guarantees the return of the principal, the money is usually kept on the bank’s balance sheet and reclassified as ‘others’ in the SUF data. If there is no principal guarantee, the bank may move the money off its balance sheet completely, since it is no longer the bank’s liability.
But looking at total sources of funds, excluding fiscal deposits, gives a clearer view, they say:
Anyway, Green and Li say it’s not a big deal, and the rise in WMP itself is a good thing. And given that the buzz is around a ‘soft landing’ for China has grown after the past week or so of data, it doesn’t look like the mis-measurement has any disastrous consequences. But the details are still sparse (and in Mandarin), so it will be interesting to see how future months’ data matches up on this measure.
Related links:
China’s missing M2 - FT Alphaville
The Chinese time deposit conundrum – FT Alphaville