China Worries About Tight Money
Warning lights are flashing in the context of a widening gap in growth rates for two key measures of money supply – M1 and M2 – and fears that policymaker efforts to boost the real economy are falling flat.
China must now heed the warning by putting into practice long-discussed but largely unimplemented structural reforms. Indeed, the divergence between M1 and M2 highlights an urgent need for reform measures that lift the policy restraints now holding back the Chinese economy.
M1, which includes cash and short-term bank deposits, and M2, which includes long-term deposits, have been growing at different rates since last October. The gap indicates that a People’s Bank of China effort to expand the money supply hasn’t effectively benefitted the real economy.
M1 grew 25.4 percent in July compared to the same period last year, underscoring a central bank effort to pump liquidity into the market as a way to bolster the slowing economy. The year-on-year rate was only 6.6 percent in July 2015.
Credit money systems only grow when there are willing borrowers. When peak debt is reached, as it was in the developed world and China, credit deflation begins. The PBoC can pump away, but it ends up flowing into temporary asset bubbles. The latest, which did generate some credit growth, was housing. It peaked in July with residential mortgages making up more than 100 percent of bank lending, as credit to the rest of the economy contracted. With real estate slowing, the next target is….:
Meanwhile, speculators are moving in. The property market in the first half of this year was flooded with cash from companies, especially SOEs, and household savings that pushed up real estate prices in many cities.
After several city governments responded to the mini-boom for real estate by tightening property investment controls, investors started diverting capital into the bond market. But that move triggered concerns about a bond bubble and excessive leverage, prompting analysts to predict that the stock market might become the next favorite investment target.
Your bubble recap: real estate, stocks, bonds, real estate, bonds and now possibly stocks. All the while, China’s real economy is slowing. This could go on for years as investors are distracted by the shiny bubbles.