Eliza Wong
Key Statistics at a Glance
- M2 money supply reached 330.29 trillion yuan ($45.6 trillion) in June, growing 8.3% year-on-year
- First-half RMB loans expanded by 12.92 trillion yuan ($1.78 trillion)
- Enterprise loans surged 11.57 trillion yuan ($1.6 trillion), dwarfing household lending
- Deposit growth hit 17.94 trillion yuan ($2.47 trillion), with households accounting for over 60% of increase
- Interbank rates fell to multi-year lows, averaging just 1.46%
Interpreting China’s Money Supply Momentum
The People’s Bank of China’s latest monetary data reveals continued expansion in broad money supply despite economic headwinds. China’s money supply growth remained resilient in June, with M2 expanding by 8.3% year-on-year to a record 330.29 trillion yuan ($45.6 trillion USD). Narrow money supply (M1) grew a moderate 4.6% to 113.95 trillion yuan ($15.7 trillion), while currency in circulation (M0) surged 12% to 13.18 trillion yuan ($1.82 trillion), reflecting PBOC’s cash injection measures.
Understanding the Monetary Aggregates
M2 – encompassing cash in circulation and all deposit types – serves as a primary indicator of liquidity conditions. The steady 8%+ expansion pace signals the central bank’s commitment to maintaining accommodative policy. With net cash injections totaling 363.3 billion yuan ($50 billion) in H1, policymakers appear focused on stimulating economic activity through enhanced liquidity. China’s money supply growth significantly outpaced nominal GDP expansion, suggesting monetary stimulus is compensating for soft demand conditions.
Corporate vs Household Credit Divergence
Loan data reveals stark contrasts between sectors. Corporate loan growth dominated credit expansion with an 11.57 trillion yuan ($1.6 trillion) increase – nearly 90% of total new lending. Within this segment, medium-to-long term corporate loans rose 7.17 trillion yuan ($990 billion), signaling investment in productive capacity. Meanwhile, household borrowing barely edged upward (1.17 trillion yuan/$161 billion), weighted entirely toward mortgage lending while consumer credit contracted. This divergence spotlights persistent weakness in consumer confidence despite corporate financing support.
Deposit Dynamics and Savings Behavior
China’s deposit expansion reached 17.94 trillion yuan ($2.47 trillion) in H1 – exceeding credit growth by nearly 40%. Household deposits accounted for 10.77 trillion yuan ($1.49 trillion) of this total, extending the precautionary saving trend observed since 2022. Corporate deposits grew a modest 1.77 trillion yuan ($244 billion), reflecting restrained business investment. This continued accumulation of savings presents policy challenges for authorities seeking to convert liquidity into economic activity.
The Liquidity Paradox
The deposit expansion coupled with declining loan-to-deposit ratios illustrates a peculiar monetary paradox: abundant system liquidity coexisting with constrained credit demand. Despite PBOC providing affordable financing channels through measures highlighted in its monetary policy reports, conversion into productive investment remains partial. China’s money supply growth continues outpacing transmission mechanisms, creating a challenge for monetary policymakers.
Market Rates and Liquidity Conditions
Interbank rates slid to multi-year lows in June, with 7-day weighted averages dropping to 1.46% (interbank lending) and 1.50% (bond repos). These figures were 41bps and 39bps below 2022 levels respectively. Daily interbank trading volumes remained robust despite a modest YoY decline. Such depressed rates underscore persistent liquidity surpluses within China’s banking system – a phenomenon exceeding most major economies’ post-pandemic experiences.
Policy Rate Context
The declining market rates occur against unchanged PBOC benchmark rates. The Loan Prime Rate (LPR) has held steady at 3.55% since August 2022 according to China’s National Interbank Funding Center. This growing spread between policy rates and market rates reflects abundant liquidity distribution through open market operations even as formal lending rates remain anchored.
External Sector Developments
China’s foreign reserves remained resilient at $3.32 trillion despite currency pressures. External trade momentum witnessed through cross-border RMB settlements revealed mixed patterns: goods trade dominated 8.3 trillion yuan ($1.14 trillion) current account settlements, while foreign direct investments reached 2.65 trillion yuan ($366 billion). Yet the yuan hit 7-month lows against the dollar, ending June at 7.1586 RMB/USD.
Trade Financing Implications
With exporters increasingly settling transactions in yuan – evidenced by the 6.38 trillion yuan ($880 billion) goods trade settlement volume – currency internationalization steadily advances. Yet foreign investors remain cautious toward Chinese assets, reflected in reduced FDI momentum compared to pre-pandemic trends.
Sectoral Implications and Economic Outlook
The monetary statistics provide crucial insights for key economic sectors:
- Banking Sector: Depressed interbank lending yields squeeze profitability prospects. Net interest margins fell to record lows of 1.74% in Q1 2023 according to CBIRC data
- Property Sector: Inadequate household lending growth continues constraining recovery despite developer financing support
- Monetary Policy: Persistent disinflationary pressures emerge despite liquidity growth (June CPI rose just 0.2% YoY)
- Corporate Sector: Robust medium-term credit expansion suggests confidence in manufacturing upgrades despite global demand uncertainty
Inflation Puzzle
The widening disconnect between money supply growth and consumer inflation remains analytically challenging. Traditional monetary theory suggests persistent inflation surges following extended M2 expansions, yet China continues facing disinflationary pressures. This points to velocity of money declines – reflecting subdued credit transmission effectiveness rather than general overheating risks.
Pathways Forward
The June monetary statistics confirm PBOC’s accommodative stance yet highlight transmission effectiveness challenges. Sustainable economic recovery likely requires complementary fiscal stimulus – particularly household consumption incentives accelerating money circulation. Monetary policy strategies focused exclusively on expanding liabilities without activating spending produce diminishing returns. China’s money supply growth must catalyze faster consumption-investment cycles to achieve stabilization objectives.
Investors should monitor corporate borrowing patterns for signs of enduring recovery momentum while watching deposit trends for shifts in saving behaviors. Policymakers need targeted delivery mechanisms to activate idle balances in household balance sheets – a prerequisite for macroeconomic rebalancing. Banking officials will require innovative approaches protecting financial stability amid sustained margin pressures. Continued China’s money supply growth remains necessary but insufficient alone – strategic synchronization across policy domains appears essential moving forward.
