China has tripled its money supplies since the end of 2006

[jimmy olsen]

Looks bad, but China seems to have been on the verge of a bursting bubble for years and years and nothing ever seems to happen. Why will this be the straw that breaks the camel's back?

http://www.nytimes.com/2014/01/16/business/international/china-dwarfs-us-in-monetary-stimulus.html?partner=rss&emc=rss&smid=tw-nytimes&_r=0

China Dwarfs U.S. in Monetary Stimulus

By KEITH BRADSHERJAN. 15, 2014

HONG KONG — Move over, Janet Yellen and Ben Bernanke. Step aside, Mario Draghi and Haruhiko Kuroda. Compared with Zhou Xiaochuan, the longtime governor of the People's Bank of China, they are all lightweights when it comes to monetary stimulus.

The latest data released by China on Wednesday shows that the country's rapid growth in money supply has continued. Mr. Zhou and his colleagues have only begun the difficult and dangerous task of reining it in —– a task that still lies ahead of the United States Federal Reserve as it begins its own gradual taper this year.

China's money supply, broadly measured, has now tripled the money sloshing around its economy since the end of 2006. That dwarfs the indirect effects of quantitative easing in the United States, where the broadly measured money supply rose only 55 percent from 2006 through the end of November.

China's tidal wave of money has driven asset prices through the roof. Housing prices have soared, feeding fears of a bubble while leaving almost everyone else feeling poor.

The rapidly expanding money supply also reflects a flood of loans from the banking system and the so-called shadow banking system that have kept afloat many inefficient state-owned enterprises and bankrolled the construction of huge overcapacity in the manufacturing sector.

Cao Maolan, a real estate broker in Nanjing in east-central China, helped a young woman buy her first apartment seven years ago, a 650-square-foot unit for which she paid the equivalent of $60,000. The young woman sold the apartment in less than two years for a 50 percent profit, Ms. Cao said, and has traded up to a bigger apartment every year since then, now living in a 2,150-square-foot apartment for which she paid $985,000, mostly in cash with the profits from previous deals.

"Everyone who bought property has done really well," Ms. Cao said.

But young college graduates, whose numbers have quintupled in the past decade as China's universities expand rapidly, worry that they may never be able to afford to buy a new home.

Zheng Yilong, a 22-year-old college graduate in Wuhan, an industrial hub of 10 million people in central China, earns $575 a month in a low-level banking job with limited opportunities for raises. But he has found that even a 540-square-foot apartment on the outer edge of the metropolitan area, with a long commute, costs $98,400, or 14 years' pay.

"I cannot even begin to imagine how I can earn and save enough to buy even a small unit here in Wuhan, so I don't think about it — there is no solution," he said in a telephone interview Wednesday.

The money supply and credit data released Wednesday morning show that the central bank has begun to tackle the problem, but slowly. The broad measure of money supply, known as M2, grew 13.6 percent last year, barely less than its increase of 13.8 percent a year earlier, the Chinese central bank said in a news release.

This means the money supply is still charging well ahead of inflation-adjusted economic growth, which has been about 7.6 percent; the exact figure for the fourth quarter of last year is scheduled for release on Monday.

Growth in M2 almost reached 30 percent at the end of 2009, when China was using monetary policy to offset the effects of the global financial crisis. China has reduced the pace of money supply growth since then, but kept it well above the pace of economic growth throughout, which means it has done little to sop up the extra cash issued during the crisis.

The question now is whether the central bank can further slow the growth of credit and the money supply without causing a slump in housing prices or a sharp slowdown in the credit-dependent corporate sector. Even the very modest slowdown in money supply growth so far has already contributed to two sharp but short-lived increases in interbank interest rates in June and December, which roiled markets in China and around the world.

Corporate lending rates are already approaching 10 percent a year, the highest in any of the world's largest economies. Many businesses are struggling for more loans to repay previous borrowing.

China's central bank "is in a very difficult situation; it needs to tighten but the whole system is not used to tightening, they are used to money printing," said Shen Jianguang, a China monetary economist in the Hong Kong office of Mizuho Securities, a Japanese investment bank.

M2 encompasses money in circulation, checking accounts, savings accounts and certificates of deposit. It is the main money supply indicator watched by the People's Bank of China in trying to balance the need for economic growth with the dangers of inflation.

M2 has grown so fast in China not just because the central bank has been issuing a lot of renminbi but also because the state-owned banking system has lent and relent those renminbi with encouragement from the government, creating a multiplier effect.

China has also undergone financial liberalization in the past five years that has accelerated the pace of lending. An extensive and loosely regulated "shadow banking" system has emerged, partly because of the willingness of regulators to allow banks to classify loans to new financing companies not as corporate loans but as interbank loans, for which little capital needs to be reserved.

The Federal Reserve has actually stepped up much more rapidly than China its injections of money into the financial system. But the broadly measured money supply has increased more slowly in the United States than in China because American banks have been much slower to lend and relend the extra money.

Broadly measured money supply plays an important role in the pace of economic growth as well as inflation. Consumer inflation has not yet become a big problem: Falling commodity prices and widespread manufacturing overcapacity held down consumer inflation to 2.6 percent last year in China.

But asset price inflation, notably the country's soaring real estate prices and corresponding decline in housing affordability, has been a constant worry for the authorities.

To be sure, one reason M2 in China is so much larger than in the United States is that the United States relies heavily on bond markets to finance economic growth, and bonds are not included in M2. China relies much more on bank lending, which is indirectly reflected in M2.

But that difference in financial system structure does not explain why China's M2 money supply has soared so much faster in percentage terms since 2006 compared with the money supply in the United States.

[Brazen]

Maybe China will just ask for the $1.2 trillion it owns in US debt back.

[Grey Fox]

Maybe China will just ask for the $1.2 trillion it owns in US debt back.

Maybe the Communist party doesn't want to be in power anymore?

[grumbler]

Maybe China will just ask for the $1.2 trillion it owns in US debt back.

Debt doesn't work that way.  If "China" insisted, they could probably get 50 cents on the dollar by flooding the market for secondary bonds backed by the US bonds the Chinese hold (and thus collapsing the secondary market), but I think that would just precipitate the crisis the Chinese government is trying to avert.

[Capetan Mihali]

Looks bad, but China seems to have been on the verge of a bursting bubble for years and years and nothing ever seems to happen. Why will this be the straw that breaks the camel's back?

Well if it's anything like the Canadian housing bubble...

[Admiral Yi]

Maybe China will just ask for the $1.2 trillion it owns in US debt back.

Don't see how this would affect China's money supply.

[DGuller]

Maybe China will just ask for the $1.2 trillion it owns in US debt back.

I don't think US debt is callable.

[Eddie Teach]

Well if it's anything like the Canadian housing bubble...

Then it will be intensely boring.

[garbon]

Cao Maolan, a real estate broker in Nanjing in east-central China, helped a young woman buy her first apartment seven years ago, a 650-square-foot unit for which she paid the equivalent of $60,000. The young woman sold the apartment in less than two years for a 50 percent profit, Ms. Cao said, and has traded up to a bigger apartment every year since then, now living in a 2,150-square-foot apartment for which she paid $985,000, mostly in cash with the profits from previous deals.

She moved every year? Ugh.

[The Minsky Moment]

I like the objective, analytical languague.

the money sloshing around its economy

China's tidal wave of money

Let's put aside the basic methological question about whether M2 aggregates are the "right" way to measure the money supply or even whether the supply of money is a coherent concept that can be subjected to measurement in this way.

The question is whether the supply (or growth) is too high.  And the piece doesn't answer the question.  Yes M2 has grown faster than GDP but does that signal that M2 growth is excessive or does it indicate that the Chinese economy is becoming more financialized as liberalization and development proceed?

One obvious place to look in formulating an answer is inflation, but the piece concedes that inflation is low and falling.  RGDP is falling as well.  It certainly doesn't look like there is a sustained problem with chronic money supply growth going on.

[Razgovory]

Ecometrics?