If the M1 Gauge is Adjusted, What Will Be the Impact? (AI Translation)

若M1口径调整，影响几何

At the 15th Lujiazui Forum on June 19, Governor Pan Gongsheng highlighted the necessity of examining the inclusion of personal demand deposits and other liquid financial products into the M1 statistical spectrum, which has generated significant market interest. The article evaluates the potential impacts of modifying the M1 classification using international comparisons [para. 1].

In May, M1's year-on-year growth rate fell by 5.3 percentage points, from 1.1% in March to -4.2%. If household demand deposits were included in M1 statistics, the adjusted growth rate would also show a decline, albeit less severe [para. 2]. Broadening the action to include client reserves of non-bank payment institutions, money funds held by residents, and banks' cash management wealth products results in a smaller decline. Both measures still indicate a reduction, although they would present lesser declines in comparison with the current standards. This signifies improvement over the existing M1 stats, despite financial de-leveraging factors intrinsically impacting the values [para. 3].

China's current M1 metrics do not encompass household demand deposits, government demand deposits, or non-bank financial institution deposits, unlike standards used by economies such as the United States, the Eurozone, and Japan. As a result, China’s M1 is significantly swayed by more volatile corporate deposits rather than more consistent household current deposits [para. 4][para. 5]. These exclusions lead to high sensitivity of M1 to short-term financial initiatives, such as efforts to prevent idle funds. Such financial activities impact corporate deposits significantly, adding volatility to the M1 figures [para. 6].

Corporate current deposits have shown significant drops, correlating with loan repayments and a shift to higher-yield financial products [para. 7]. Correspondingly, the scale of bank wealth management products notably surged, leading to an increase in such investment shifts [para. 8]. This movement is significant, as corporate current deposits constitute 30-40% of China’s M1 balance, making M1 highly susceptible to such shifts [para. 9][para. 10].

The year-on-year growth rate of M1 showed a continuous decline, reaching historic lows, impacted by both financial deleveraging and other economic factors, including low corporate profit recovery and unstable real estate transactions. A slow recovery of corporate profits has particularly dragged down M1 growth. Declining PPI also adds to this slow recovery, which in turn impacts M1 figures [para. 11][para. 12]. More stable property transactions and enhanced governmental fiscal spending remain crucial for boosting M1 growth. The reduction in interest rates on bank deposits may further shift corporate deposits to alternative financial products [para. 13][para. 14].

Analyzing international statistics suggests that including household demand deposits and other financial products in M1 can be considered for a more robust metric. The adjusted M1 would reflect less severe declines in growth rates and reduced discrepancies between M1 and M2 growth rates, presenting a more accurate financial picture [para. 15]. Broader inclusion could push M1’s balance to RMB 124 trillion, compared to the current RMB 64.7 trillion, and lessen the annual decline rates [para. 16][para. 17].

Unlike other regions, Chinese M1 excludes non-bank financial institution deposits and fiscal deposits, often counting only organizational and institutional deposits. Comparatively, the U.S. M1 data includes both household and local government deposits, which results in a broader and more stable metric [para. 18][para. 19]. Notably, China’s financial products with high liquidity or direct payment functions, such as money market funds and customer reserves in payment institutions, could directly impact economic measures like M1 [para. 20]. Overall, broader inclusion in M1 definitions aligning with international norms could stabilize and reflect economic realities better [para. 21][para. 22][para. 23][para. 24].