China's money supply continued to increase at a "basically appropriate" pace in September, boosting confidence that the State's tightening measures to bring the fast-growing economy to a soft-landing are working.

M2, the broad measure of money supply, grew by 13.9 per cent on a year-on-year basis to 24.4 trillion yuan (US$2.9 trillion) at the end of last month, the People's Bank of China (PBOC), the nation's central bank, said on Friday.

September's M2 pace, which reflects aggregate demand in the economy, was 6.8 percentage points down from a year earlier, but up 0.3 percentage points from the level recorded last month, a figure many analysts feared was too slow.

"Speaking overall, the current level of money supply is basically appropriate," the PBOC said.

Outstanding renminbi loans rose by 13.6 per cent on a year-on-year basis to 17.3 trillion yuan (US$2.08 trillion) at the end of September, down 9.9 percentage points from a year earlier and down 0.5 percentage points from August.

Renminbi deposits stood at 23.5 trillion yuan (US$2.8 trillion), up 15.8 per cent from a year earlier.

"Overall, financial performance was stable, and was in line with macro management targets," the bank said.

China started to cool down frenzied fixed investment and loan growth, as well as accelerating prices, in the second half of last year. Authorities have taken a slew of measures, including three increases in bank reserve requirements that restrict banks' lending capacity; and credit curbs and land controls.

Subsequently, key indicators such as M2 and fixed investment growth numbers have dropped in recent months, but the faster-than-expected downshift has prompted new worries about an abrupt economic slowdown.

The marginal rebound in renminbi loan growth last month was a welcome sign, analysts say, but they are still worried about the tightening measures overshooting. "We are still concerned," said Li Ruoyu, an analyst with the State Information Centre.

Although M2 growth rebounded, the pace of M1, which covers cash in circulation and demand deposits, and reflects real demand more accurately, slid by 1.4 percentage points to 13.7 per cent last month, she said.

The proportion of long-term loans in total bank lending continued to grow, aggravating asset-liability mismatches at the banks, Li said, although the slowdown in short-term loan growth, which analysts say is too rapid and has led to liquidity difficulties at many small companies, was less abrupt in September.

Li said the possibility of an interest rate rise this year is slight, given the continued slowdown in monetary and loan growth and the central bank's opinion that tightening measures are working.

Some analysts are calling for an interest rate increase to contain price increases, citing the possibility of a sharp rebound in fixed investment growth.

"When M2 keeps dropping like this, the likelihood of a sharp rebound in fixed investment is slight, because the source of funding is no longer there," Li said.

(China Daily October 16, 2004)