China’s Credit Expansion Revs Up Again in June as M1 Surges

Updated on
  • ‘Money and credit remain solid,’ CICC economist Yu says
  • Aggregate finance exceeded all economist forecasts in survey

China’s broadest measure of new credit rose more than expected, suggesting the cash taps remain open as central bank policy makers seek to prop up economic growth.

Aggregate financing was 1.63 trillion yuan ($244 billion) in June, exceeding all 29 analyst forecasts in a Bloomberg survey. New yuan loans climbed to 1.38 trillion yuan, versus an estimate for 1 trillion yuan, the People’s Bank of China data showed Friday.

The data signal policy makers remain determined to keep old growth engines humming even at the cost of adding to debt risk. After a lending spree in the first quarter, top leaders had signaled moves to keep a lid on credit growth to contain financial risks.

"Money and credit remain solid," Yu Xiangrong, an economist from China International Capital Corp. in Hong Kong, wrote in a note. "Credit data indicates monetary policy remained accommodative, without an obvious further easing."

Two of the main money supply gauges continued to diverge in June. M1, which includes bank deposits and currency in circulation, rose 24.6 percent from a year earlier, the biggest increase in six years. The broader M2, which also includes savings deposits, increased 11.8 percent, matching the May reading.

The aggregate amount of M2 is significant given that it’s almost twice the size of gross domestic product, said Sheng Songcheng, head of PBOC’s statistics and analysis department, according to a report carried Friday by Beijing-based Yicai.com.

Sheng said the widening gap between M1 and M2 growth is due to multiple reasons, according to the Yicai report

On M1 surge:

  • Narrower rate difference between saving deposits and demand deposits means more household and corporate savings are being held in demand deposits, which are counted in M1 but not in M2, the report said
  • When the economy isn’t good, firms don’t want to invest but hold the cash and wait for investment opportunities
  • When people make down payments for home purchases, that boosts developers’ demand deposits

On M2 slowdown:

  • Bankers’ acceptances -- a bank-backed guarantee for future payment -- declined, leading to fewer deposits as guarantees
  • Increased provincial bond issuance led to lower money creation because more funds are used to purchase the debt
  • Foreign exchange reserves declined, leading to lower domestic money supply.

— With assistance by Xiaoqing Pi, and Yinan Zhao

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