Photographer: Wang Zhao/AFP via Getty Images

PBOC Says Don’t Look at Short Term After Money Supply Slumps

  • July credit growth was a distortion, China’s central bank says
  • Growing gap between M1 and M2 doesn’t suggest ‘liquidity trap’

China’s central bank urged investors not to focus too much on short-term concerns and said the diverging pace of credit expansion doesn’t mean monetary policy is losing steam.

July credit growth slowing to a two-year low was a distortion and the reports for August and September will show it rebounding, the People’s Bank of China said Monday in Q&A statement posted to its website. Markets should avoid over-interpretation of short-term data for a specific month, the PBOC said.

The commentary also said the growing gap between two money-supply gauges, M1 and M2, isn’t an indicator of a “liquidity trap,” an economics term for when central bank cash injections into the economy fail to spur growth as monetary policy loses potency. The PBOC also said Monday it will keep monetary policy prudent and flexible, and will fine-tune it at the appropriate time. Liquidity in the banking system is ample, it said.

The comments follow data Friday showing the broadest measure of new credit rose at the slowest year-on-year pace in two years. Aggregate financing was 487.9 billion yuan ($73.4 billion) in July, less than the 1 trillion yuan estimate in a Bloomberg survey of economists.

The broad M2 money supply index, which includes savings deposits, climbed 10.2 percent in July from a year earlier, the least since April 2015, and trailing the government’s full-year target of around 13 percent. By contrast, M1, the narrower total of cash, checks and demand deposits, rose 25.4 percent, the most in six years. That gap between growth rates doesn’t indicate there’s a “liquidity trap,” the PBOC said Monday.

A senior official at the central bank said last month that companies may be falling into a “liquidity trap” and that the government still has room to expand the fiscal deficit. Signs of a liquidity trap are showing in businesses and households, said Sheng Songcheng, head of the statistics and analysis department at the PBOC, according to a July article in National Business Daily.

Other data released Friday showed industrial production, retail sales and fixed-asset investment all increased less than economists had projected in Bloomberg surveys.

— With assistance by Yinan Zhao

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