China's money supply and credit growth slowed significantly last month, increasing confidence that the State's tightening measures this year are adequate enough to cool down economic growth at a measured pace.

Fixed investment figures, another major factor prompting worries about an overheating economy, are also expected to show a notable easing off in June, further reducing the possibility of a much-anticipated interest rate rise, analysts said yesterday.

Broad money M2, which covers cash in circulation and all deposits, rose 16.2 percent year-on-year to 23.8 trillion yuan (US$2.8 trillion) at the end of last month, the People's Bank of China, the nation's central bank, said yesterday. The pace was 4.7 percentage points lower than a year earlier, and 1.3 percentage points down from the previous month.

Outstanding renminbi loans totaled 17 trillion yuan (US$2 trillion) at the end of June, up 16.3 percent year-on-year, which was an impressive 6.8 percentage points slower than a year earlier and 2.3 percentage points down from the end of May.

"The results of financial management have been noticeable," the central bank said in a press release. "Overall, the adjustments in the aggregate scale of money and credits were appropriate and financial performance was healthy and stable."

The pronounced easing in money supply and credit growth outpaced many analysts' expectations. Many were worried earlier this year that the authorities may have to resort to an interest rate rise later this year should earlier monetary policy actions and administrative measures, mainly three increases in bank reserve requirements and tight land and price controls, fail to harness the expansive growth in new loans and fixed investment.

"We just did not expect it to come down in just two months," said Wang Yuanhong, a senior analyst at the State Information Center. "That means macroeconomic management has yielded some really obvious results."

June's industrial output numbers released earlier this month also showed some easing. The authorities are expected to release fixed investment and consumer price data for June later this week, which analysts expected to be also slower than May.

"Fixed investment should be within 20 percent for June, as both M2 and loans were down," Wang said.

Fixed investment surged a staggering 42.8 percent in the first four months of the year, following an even faster growth last year. The pace was particularly fast in certain red-hot sectors like steel, cement and aluminum.

But the growth is starting to get under control after the State took both monetary and administrative measures, slipping to a surprisingly low 18.3 percent in May.

"The need to raise interest rates is even weaker now," Wang said.

The central bank has been saying recently that it needed more time to judge the effect of earlier monetary policy actions before it takes further steps.

The unexpected slowdown in major indicators has also prompted worries about the possibility of an abrupt economic slowdown. The authorities want to bring economic growth down from the current levels where many resources such as oil have been constrained, but need it to be above 7 percent to generate enough jobs for laid-off workers.

"We need to prevent such a downward trend from strengthening in the coming months," Wang said.

But robust demand from the external sector, as indicated in the June figures, would help prop up economic growth as loans and fixed investment downshift, according to Goldman Sachs.

China's exports grew 46.5 percent year-on-year, up from 32.8 percent in May, while imports grew 50.5 percent, up from 35.3 percent in May.

"The data confirms that external demand for China's exports remains robust," said Liang Hong, China economist for Goldman Sachs (Asia). "External sector strength provides some buffer for the slowing in fixed investment in the second quarter."

Despite worries that the economy is overheating, the central bank has said the nation's economic targets for this year, including a 7 percent gross domestic product growth and 17 percent for monetary growth, are achievable.

China's foreign exchange reserves rose by 35.8 percent on a year-on-year basis to US$470 billion at the end of June, the central bank said yesterday. Foreign exchange reserve increases in the first half of the year totaled US$67.3 billion, US$7.2 billion more than the same period last year.

(China Daily July 14, 2004)