Chinese Money Growth Producing Mixed Signals, Limited Real Economy Results

China has had two failed bill auctions this week, due to fears the government, which has started to raise rates, will continue down that path to curb money supply growth. Yet with growth flagging (anything under 8% is inadequate to absorb new workers), choking off stimulus now does not seem well timed. From Bloomberg:

China failed to attract enough bidders in a government debt sale for a second time this week on speculation that policy makers will rein in money supply to avoid any pickup in inflation.

The Ministry of Finance sold 25.1 billion yuan ($3.7 billion) in bills of the 35 billion yuan it had sought…

The People’s Bank of China has been pushing up money-market rates in the past two weeks, seeking to choke off the supply of funds used to speculate on stocks and real estate without derailing a 4 trillion yuan economic stimulus plan. Chinese banks extended 1.53 trillion yuan of new loans in June, more than double the amount in May, the central bank said on July 8.

“The central bank’s open-market operations suggest concerns that the rapid surge in new bank lending in the first half of this year could fuel inflation,” said Tommy Xie, an economist at Oversea-Chinese Banking Corp. in Singapore. “Market players have also started to worry about early tightening risk.”…

China bond yields “have not tracked the V-shape move in U.S. Treasury yields” as the global credit crisis eased, Tim Condon, Singapore-based head of Asia research at ING Groep NV, wrote in a research note today. “Over the next six to 12 months we expect monetary tightening to drive the five-year Treasury bond yield back to 4 percent.”

China’s bond market swelled in size to about $2.2 trillion at the end of March, compared with $1.9 trillion a year earlier, paced by corporate bond sales, according to the Asian Development Bank. Demand has been waning in recent weeks. An auction of 28 billion yuan of five-year government securities on July 3 drew bids for 1.42 times the debt on offer, compared with a 1.65 bid-to-cover ratio in a sale of 28 billion yuan of 10- year notes on June 17.

The government failed to complete a bond sale on July 8 for the first time in almost six years, selling 27.5 billion yuan of the 28 billion yuan in one-year notes it auctioned.

Reader Michael explains the underlying dynamics, that money growth has not produced much real economy stimulus. From Cajing:

The People’s Bank of China, or the central bank, should shift from its moderately loose policy stance and signal clearly that it will stabilize money supply in the second half as inflationary fears return, a government researcher said.

Xia Bin, a director at the Development Research Center of the State Council, said on June 4 that M2, the broadest measure of money supply, typically grows at 14 percent to support a 10 percent expansion in gross domestic product. However, he said, money supply growth is currently far above 20 percent.

Central bank figures show M2 grew 25.7 percent year-on-year in May to 54.9 trillion yuan.

As Michael noted:

Given that they are probably going to grow ~7%, these stats goes to show how dire the underlying economy in china really is…their stimulus can’t go on forever…

Well, technically, it could, but at the risk of even more diminished results per amount of money thrown at the problem.

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  1. Sergei

    Actually, money growth is even more dramatic than the M2 yoy growth of 25.7% would indicate. Loan growth in first half of 2009 was RMB7.36trillion, or about US1.08trillion. Given that its annual GDP is around US$4trillion, that's a 25 percentage point increase in loan to GDP in 6 months, or 50% annualised. The authorities are really throwing everything but the kitchen sink at the slowing economy…

  2. mxq

    I can't help but think that touching that auction paper is like jumping in front of a freight train in order to pick up a lost dollar bill…

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