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China New Loans, Money Supply, Forex Reserves Trail Estimates

The People's Bank of China
The People's Bank of China in Beijing. Photographer: Sim Chi Yin/Bloomberg

China’s money supply grew at the slowest pace in a decade in September, new loans were the smallest in almost two years and quarterly foreign-exchange reserves rose the least in more than 10 years.

New local-currency loans were 470 billion yuan ($73.7 billion) and M2, the broadest measure of money supply, rose a less than estimated 13 percent, according to a statement on the People’s Bank of China website today.

The central bank has raised borrowing costs five times and boosted lenders’ reserve requirements nine times over the past year to rein in inflation and credit growth that surged 60 percent during the last financial crisis. Consumer prices have increased by more than the government’s 2011 target of about 4 percent every month this year.

The central bank “is now between a rock and a hard place,” said Liu Li-Gang, an economist at Australia & New Zealand Banking Group Ltd. in Hong Kong. “Inflation is high which means monetary conditions need to be tight but with a lot of bank lending happening off balance-sheet, conditions in reality aren’t as tight as would appear from this data.”

Economists at Capital Economics Ltd. and Standard Chartered Plc say money-supply growth may be distorted as savers, suffering from negative real interest rates, shift funds out of deposit accounts into wealth management products to earn higher returns. These products aren’t included in M2.

The central bank has kept interest rates on hold since July amid heightened risks of a renewed recession in developed nations and global financial turmoil. Interest-rate swaps traded in Shanghai fell to a two-month low this week on speculation the government will start to relax monetary policy as inflation eases and faltering expansion in the U.S. and Europe clouds the outlook for exports.

Policies Biting

“There is no need for further tightening as current policies are continuing to bite but underlying inflationary pressure should keep policy makers from loosening,” Shen Jianguang, an economist for Mizuho Securities Asia Ltd. said before today’s release.

China’s world-record foreign-exchange reserves increased by $4.2 billion from the end of June, the smallest gain since the third quarter of 2000, according to data compiled by Bloomberg. Weakness in the euro may have contributed to smaller growth in reserves in the quarter, according to Mizuho’s Shen. A decline in the European currency would reduce the dollar value of euro-denominated assets. China doesn’t disclose a breakdown of its reserves.

The expansion in M2 compared with the median estimate of 14 percent in a Bloomberg News survey and a 13.5 percent increase in August. The central bank set a target of 16 percent growth for this year.

New loans in September compared with the median estimate of 550 billion yuan in a Bloomberg survey and 548.5 billion yuan the previous month.

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