In September M2 was up 18.5%, up from 18.1% the previous month. M1 grew by 22.1%, down from last month’s 22.8% (all numbers are year on year). In either case it is clear that money growth is still too high, and small changes up or down won’t matter, especially since excess money growth is a stock problem as much as it is a flow problem – the “right” amount of money growth must take into account the removal of previous excess.
I believe August and September’s M1 growth rates are the highest year on year figures recorded since late 2000. M2 growth was slightly below the levels achieved for a few months during early 2006 and about 2% below most of 2003, but they are well above the average growth rates for the past three years or indeed for this decade, and it seems very difficult to bring them down.Those of us who believe that China’s monetary policy is at the root of its economic imbalances are as worried as ever.
New loan issuance is down, to RMB 273 billion in September.That puts the monthly average for the third quarter at RMB 273 billion (compared to RMB 474 billion for Q1 and RMB 374 billion for Q2, according to calculations by Credit Suisse).On an annualized basis loans during the third quarter are growing at a rate equal to roughly 15% of GDP.Year to date they have grown by over 21% of GDP.
Meanwhile RMB deposits continue to drop (by just over RMB 52 billion in the last two months) presumably to go into the stock markets, but with RMB 17.2 trillion in the banking system (about $2.3 trillion), there is plenty more where that came from.
Some predictions?The recent pressure to slow down loan growth will abate after a few months, as it always does, and loan growth will accelerate once more.The PBoC recently issued more mandatory central bank (low coupon) notes to banks that they believe are lending too aggressively.To me, the fact that they are doing this is not evidence of the success of administrative measures but rather a sign of how difficult it has been (with several minimum reserve and interest rate increases) to slow loan growth.At any rate they have issued $95 billion of these this year over six different occasions.There doesn’t seem to me much infamy associated with being punished this way.
If the root cause of money and loan growth is expanding reserves – up $367 billion year to date, or roughly 17% of GDP, without counting the amount of reserves, if any, that were transferred to the CIC – then it doesn’t much matter what kind of administrative measures they use. At most, bank restraint would simply increase money flow into other forms of financing. Kelvin Zhao, one of my former Tsinghua students, recently wrote to me about some rather weird real estate transactions that are taking place in Wenzhou (China’s capital of “informal” banking). I don’t fully understand his explanation of what is happening, but it seems pretty clear to me that a lot of people are still finding it a little easy to raise money.
Michael Pettis is a professor at Peking University's Guanghua School of Management, where he specializes in Chinese financial markets. He has also taught, from 2002 to 2004, at Tsinghua University’s School of Economics and Management and, from 1992 to 2001, at Columbia University’s Graduate School of Business. He is a member of the board of directors of ABC-CA Fund Management Co., a Sino-French joint venture based in Shanghai.
Pettis has worked on Wall Street in trading, capital markets, and corporate finance since 1987, when he joined the Sovereign Debt trading team at Manufacturers Hanover (now JP Morgan). Most recently, from 1996 to 2001, Pettis worked at Bear Stearns, where he was Managing Director-Principal heading the Latin American Capital Markets and the Liability Management groups. He has also worked as a partner in a merchant banking boutique that specialized in securitizing Latin American assets and at Credit Suisse First Boston, where he headed the emerging markets trading team. Besides trading and capital markets, Pettis has been involved in sovereign advisory work, including for the Mexican government on the privatization of its banking system, the Republic of Macedonia on the restructuring of its international bank debt, and the South Korean Ministry of Finance on the restructuring of the country’s commercial bank debt.
Pettis is a member of the Institute of Latin American Studies Advisory Board at Columbia University as well as the Dean’s Advisory Board at the School of Public and International Affairs. He is the author of several books, including The Volatility Machine: Emerging Economies and the Threat of Financial Collapse (Oxford University Press, 2001). He received an MBA in Finance in 1984 and an MIA in Development Economics in 1981, both from Columbia University.
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January, 2008
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