China's money supply jumped the fastest in seven months as the central bank eased M2 to stimulate the economy, the central bank said Tuesday.

M2, the broadest measure of money supply, rose 17.8 percent in December from a year earlier, up from November's 14.8 percent growth, the People's Bank of China said on its Website on January 13.

The supply of new yuan grew to an 11-month high to reach 771.8 billion yuan (US$115 billion). The growth of new-yuan lending hit the second highest level since April 2003. New-yuan loans grew 4.91 trillion yuan last year, up 1.28 trillion yuan from a year ago.

Industrial Bank Chief Economist Lu Zhengwei said that the soaring credit growth, supported by government measures, has helped shore up money supply.

The central government in November announced a massive 4-trillion-yuan stimulus package to ride out the economic downturn, including encouraging big state-owned banks to add credit support to infrastructure projects. The central bank, meanwhile, shifted its monetary policy from "tight" to "moderately easing" in the fourth quarter.

Other measures included lifting credit quotas and the reserve requirement ratio and cutting interest rates to free up more liquidity in the economy.

"After analysis, we found that most of the newly added lending is for government-backed projects or bank bills whose risks are relatively low, indicating that banks are still cautious and conservative in issuing credit," said Lu yesterday. "Credit will very likely remain stagnant in the second half of this year."

Lu said the central bank is likely to ratchet down the reserve requirement further by 50 percentage points and cut the interest rate by 27 percentage points.

The central bank has cut interest rates five times since September, cutting the one-year benchmark lending rate by 1.89 percentage points to 5.31 percent.

Now, larger banks like the country's Big Five face a reserve ratio of 15.5 percent while smaller players like city-level commercial banks operate under a 13.5-percent reserve requirement.

Huang Yiping, a Citibank economist, said China is likely to achieve an average of 8 percent economic growth in 2009.

Huang said that once inventory adjustment is over, probably by the end of the first quarter, production should rebound rapidly.

(Shanghai Daily January 14, 2009)