Chinese money supply data point to faster growth in 2021

Money supply growth in the People's Republic of China picked up noticeably last month, leading some economists to push back on expectations for further interest rate cuts - at least for the moment.

According to the people's bank of China, the year-on-year rate of growth in so-called 'narrow' money supply or M1 accelerated from 5.5% for April to 6.8% in May (consensus: 5.7%).

Growth in M2 on the other hand was unchanged at 11.1% (consensus: 11.3%), but Miguel Chanco at Pantheon Macroeconomics attributed the 'miss' relative to economists' to base effects.

Indeed, upon seasonal adjustment, he estimated that the quarterly annualised rate also sped up, from 11.8% to 12.8% for the three months through May.

And the sustained acceleration in M1, Pantheon's preferred lead indicator for GDP growth, was "very encouraging", he said, pointing to a "fast start for the economy in 2021."

Likewise, once seasonally adjusted, aggregate social financing in China jumped from 3,162bn RMB in April to 3,652bn RMB for May, for the biggest monthly increase on record, Chanco added.

"Admittedly, the government’s de-risking campaign to clamp down on shadow banking appears to be slipping, with new flows of undiscounted bankers’ acceptances in the black for a third straight month. The flow of new loans on our adjustment dropped for a second straight month to RMB 1,593B, from RMB 1,865B in the previous month, returning to trend growth," he said.

"It appears that the authorities have done enough to secure China’s recovery, for now, barring a second Covid-19 wave domestically or globally. Moreover, the PBoC is becoming increasingly inclined to non-traditional policy measures to support liquidity.

"Accordingly, we no longer expect the Bank to lower its interest rate corridor before the end of Q2. However, targeted reserve ratio cuts are likely to remain part of its playbook this year."