China's monetary growth slowed considerably last month, increasing confidence that macroeconomic measures put in place this year may be effective in preventing the economy from overheating.

Broad money supply M2, which covers cash in circulation and all deposits, rose 17.5 percent year-on-year in the first five months of the year, to 23.5 trillion yuan (US$2.8 trillion) at the end of May, down 1.6 percentage points from one month earlier, the People's Bank of China (PBOC) said Thursday.

Loan growth also slowed. Outstanding renminbi loans grew 18.6 percent year-on-year, to 17.1 trillion yuan (US$2.1 trillion) at the end of May, down 1.3 percentage points from April. Last month's new loans dropped more than 50 percent from a year earlier to 113.2 billion yuan (US$13.6 billion).

"That means macroeconomic measures, or at least the efforts to contain loan increases, have had some noticeable effect," said Wang Yuanhong, a senior analyst with the State Information Center.

The slowdown in monetary growth exceeded the central bank's expectations. In its first-quarter monetary policy report released last month, the PBOC said monetary and credit growth would remain strong through June and only begin to subside in the third quarter when the effects of the bank's earlier tightening moves become evident.

Industrial output growth also slowed last month, rising 17.5 percent from the same period last year. This indicates a 1.6 percentage point drop in growth rate from April, according to the National Bureau of Statistics.

Wang said a more important number to watch is growth in fixed investment, which is the prime reason for concern that the economy is overheated in some sectors.

"But given the monetary and credit numbers, the pace (of investment growth) should also be coming down," he said.

Fixed investment numbers for May will be released later this month.

China's fixed investment soared 42.8 percent in the first four months of the year, following even faster growth last year, as the demand for such industrial materials as steel, cement and aluminum, and goods like new houses and cars remained strong.

A growing list of industries have been diagnosed with signs of excessive investment, with steel, cement and aluminum being the most obvious.

The investment frenzy pushed up growth in bank lending. A huge part of investment in the overheated sectors--as much as 60 percent--is estimated to have come from bank loans.

The PBOC has tried to bring down investment and lending numbers. Its two increases in bank reserve requirements took effect in April, and it raised rates on central bank lending. Both moves were designed to reduce the banks' lending capacities.

The China Banking Regulatory Commission has also announced broad inspections into bank loans for fixed investment projects.

Many watchers expressed doubt as to the effectiveness of those moves as loans remained on the fast track in the early months of this year, and most see an interest rate rise as the central bank's last resort. But the loan figures for May are expected to result in some adjustment to people's views.

The slowdown in monetary growth was not only a result of slower loan increases, but partly due to a downtrend in savings growth, Wang noted.

Savings growth dipped 4 percentage points in May from a year earlier to 17.9 percent, the PBOC said without elaborating further. The bank attributed April's slowdown in savings growth to increased issuance of Treasury bonds and new mutual funds.

But uncertainty remains about the nation's monetary growth for the remainder of the year, analysts said.

Despite high rates of around 20 percent in the first few months of this year, the PBOC said in its first-quarter monetary policy report that a 17 percent M2 growth target for the entire year was still achievable.

That would require annualized M2 growth to stay below 17 percent for the remainder of the year. But if monthly adjusted growth continues at the pace recorded in May, the full-year growth would be only 10 percent, a slowdown that analysts said would be too abrupt.

The PBOC did not give the monthly-adjusted growth rate of M2 for May, but only said it will be equivalent to a 10 percent full-year rate after deducting seasonal factors.

(China Daily June 11, 2004)