Chinese money supply dynamics in January point to more subdued growth

Money flows in China undershot economists' forecasts last month, pointing to a slower outlook for economic growth.

According to the People's Bank of China, the year-on-year rate of growth in the country's so-called narrow money supply, otherwise known as 'M1', slowed from 4.4% in December to zero.

The pace of growth in M2 on the other hand only ticked lower, slipping from 8.7% to 8.4%, but also came in below the 8.6% anticipated.

Aggregate financing meanwhile, picked up from 2.1bn yuan in the last month of 2019 to 5.07bn yuan for January and was ahead of the 4.2bn forecast by the consensus.

Similarly, new bank loans picked up from 1.14bn yuan for December to 3.34bn in January, with borrowing by non-financial corporates coming in at up by 10.9% year-on-year, Freya Beamish at Pantheon Macroeconomics said.

The rate of growth in non-financial borrowing was "hardly gangbusters", she added.

Growth in M1 was impacted by the shift in the timing of the Chinese Lunar New Year holidays in 2020 versus 2019, Beamish explained.

Nonetheless, in a research note sent to clients, the same economist added: "We reckon, adjusted M1 growth was in the range from 1.3%-to-4.0%. Growth is still extremely slow, putting a massive dampener on the idea of a strong recovery, virus or otherwise."

Similarly, the current rate of increase in M2 pointed to a sub-4.0% pace of expansion in China's gross domestic product on a two-to-three year horizon.

"Overall, these data suggest that the Phase One trade deal released pent up demand for borrowing. That was the dominant factor for around two-thirds of the month, before the virus scare began to take hold," Beamish said.

"The authorities are encouraging banks to keep lending through the virus, but we’d be surprised if that was enough to sustain the tentative uptrend in corporate borrowing, and we expect to see a tightening of credit and monetary conditions from the current month."