China's money supply growth is unlikely to fall significantly in the second half of this year, as long as the economy and fixed-assets investment maintain roaring double-digit growth, experts said.

 

The People's Bank of China, the central bank, had set a growth target of 16 percent for its M2, a broad measure of money supply that covers cash in circulation and all deposits, this year.

 

But the M2 had risen 18.43 percent year-on-year to 32.28 trillion yuan (US$4.03 trillion) by the end of June.

 

It grew 18.9 percent and 19.1 percent in April and May respectively.

 

The M1, an indicator of liquidity which covers cash in circulation and current account deposits, rose by 13.94 percent year-on-year to 11.23 trillion yuan (US$1.4 trillion) by the end of June, according to the central bank.

 

It grew 12.5 percent and 14 percent in April and May respectively.

 

Outstanding local currency loans in all financial institutions stood at 21.53 trillion yuan (US$2.69 trillion) by the end of June, up 15.24 percent year-on-year and 7.3 percentage points lower than the previous month.

 

New local currency lending in June increased by 394.7 billion yuan (US$49.3 billion), compared to 209.4 billion yuan (US$26.1 billion) in May.

 

The surging foreign exchange reserves and the sizzling economy, economists say, are the two major factors propelling China's robust money supply.

 

"The ballooning forex reserve is a major factor behind the dynamic growth of the money supply," said Li Yongsen, an economist at Renmin University of China.

 

The foreign exchange reserve, driven by the mounting foreign trade surplus and the inflow of foreign direct investment, had surged to a record US$941.1 billion by the end of June, the central bank said last week.

 

"The central bank has to release new money to mop up the excess US dollars in the marketplace and enforce a floating band for the renminbi, which is driving up money supply growth," Li said.

 

As the high growth of the forex reserve is unlikely to slow in the second half of this year, Li said, the same pressure to mop up excess US dollars is expected to remain unless the renminbi appreciates significantly.

 

The renminbi has risen 1.4 percent since it was revalued 2.1 percent last July, when the country abandoned a decade-old dollar peg.

 

Concerned about an overheating economy in the making, the central bank has recently taken a slew of measures to curb credit growth, another factor driving money supply growth.

 

It ordered commercial banks to raise their required reserve ratios by half a percentage point to 8 percent earlier this month, following its decision to increase the one-year benchmark lending rate by 27 base points to 5.85 percent in April.

 

The reserve ratio is the amount of cash a bank is required to deposit in the central bank, and can restrain banks' lending capacities.

 

"What the central bank can do is to control the supply side of the credit, while the demand side is largely out of its hands," said Zhang Xuechun, an economist with the Asian Development Bank's (ADB) Resident Mission in China.

 

The central bank, Zhang said, could restrain commercial banks' lending ability by raising interest rates, increasing reserve ratios, issuing central bank bills or with "window guidance."

 

"However, if the dynamic investment cannot be cooled," the ADB economist said, "the central bank will still find it hard to slow the money supply growth, as long as demand for credit continues to rise."

 

The sizzling economy and the robust growth in fixed-assets investments, may indicate that the thirst for credit will remain strong in the second half of this year, pushing the central bank to further tighten monetary policy.

 

China's economy grew 10.9 percent in the first half, according to the latest figures released on Tuesday by the National Bureau of Statistics.

 

The economy accelerated by a stunning 11.3 percent in the second quarter from a year ago, its fastest pace in more than a decade.

 

Urban fixed-assets investment jumped 31.3 percent in the first half from a year earlier, after it registered 30.3 percent expansion in the first five months.

 

With 2006 marking the start of the 11th Five-Year Plan (2006-10), the year's booming investment has been in line with expectations, said Han Meng, an economist with the Chinese Academy of Social Sciences.

 

"Typically, the first year of a five-year plan will see a rapid growth in investment; this year will be no exception," said Han.

 

The quicker-than-expected economic expansion and the surge in fixed-assets investments, economists say, may prompt the central bank to take immediate steps to tighten monetary policy. The newly released statistics, economists also say, show that the central bank may face an uphill battle in achieving its target of 16 percent growth in the M2.

 

(China Daily July 20, 2006)