Shadow Banking Crackdown Hit Money Supply Growth, Central Bank Says

The slowing rate at which China’s money supply is increasing will not affect the country’s relatively fast growth, the central bank said, attributing the statistical slow-down partly to the recent crackdown on shadow banking.

The People’s Bank of China (PBOC) on Wednesday released its “Currency Policy Execution Report” for the fourth quarter of 2017, which attempted to explain why the year’s growth of M2, a broad measurement of the money supply that includes cash in circulation and all deposits, slowed to 8.2%, a historic low and a drop of 3.1 percentage points compared to the previous year.

The government’s recent campaign to deleverage the financial sector has heavily dented banks’ off-balance-sheet businesses such as asset management products, which resulted in drastic decrease in the capital circulating within the banking system. In 2017, banks’ equity investments and other investments grew at a much slower rate, which dragged M2 growth down by more than 4 percentage points, the PBOC said in a column included in the Wednesday report.

The central bank said China’s economy maintained stable and relatively fast growth in 2017 despite the slowing M2 growth, partly because some banks have brought off-balance-sheet loans back on to their books and thereby supplied the real economy.

As China’s economic structure continues to optimize, slower M2 growth can still support a rapidly growing economy, the report said

That also explains why the official figures for new bank loans have been growing rapidly.

In 2017, a total of 13.5 trillion yuan ($2.12 trillion) of new credit was logged, 900 billion yuan more than the previous year.

In January this year, new loans reached 2.9 trillion yuan, a record monthly high and up nearly four times from the previous month.

The M2 in January stood at 172 trillion yuan, up 8.6% year-on-year.

The central bank’s Wednesday report also listed other reasons for the slowing growth of M2, including banks purchasing less corporate and local government debts, and unexpected growth in the country’s fiscal revenue in 2017.

Contact reporter Wu Gang (gangwu@caixin.com)