MNI: Tepid M1 Growth Tilts PBOC Easing Views-Advisors

A tilt toward easier policy by the People's Bank of China is underway as slower growth in a key measure of money supply shows a gloomy domestic economic outlook as a side effect of strict controls on the property market, advisors and experts told MNI.

An important measure gauging real economy liquidity, M1 also reflects how companies view production and investment conditions as it calculates their demand deposits, said Lian Ping, chief economist at Zhixin Investment Research Institute.

Lian said in that regard, M1 in China shows contraction in the real economy after a tepid 2.8% gain in October, the slowest since pandemic conditions started in January 2020. New loans printed at CNY826.2 billion last month, the lowest in a year, according to the PBOC

The numbers reflect weaker house sales in the past few months along with property investment as developers hesitate or decline to buy land for new projects, Lian said.

Advisors agreed that the PBOC should ease in a mix of targeted lending, open market operations and a cut in the reserve requirement ratio as an option to help the economy stabilise from the property downturn, power shortages and slower than expected Q3 growth.

Last week, the PBOC removed wording for a "control the floodgate of liquidity" and related language in its quarterly policy outlook that sparked more talk of an easing tilt.

EASING METHODS

Liao Qun, chief economist at China Citic Bank International, said easing through across-the-board and targeted tools would allow the PBOC to keep liquidity ample while at the same time supporting high-tech companies, small businesses and the green sector.

The PBOC should continue to guide lenders' credit supply via its "window guidance" in a bid to channel loans to specific sectors at an effective pace and boost credit, which, Liao said, is a policy with "Chinese characteristics" since most banks, including the "big four" are state-owned.

Liao also said that the obvious chill on M1 is that fewer house sales have led to cash transfers to time deposits from demand deposits, dragging down ready cash, a process he said has been in play since January and that any rebound will be tempered.

"The 2.8% growth of M1 in October should be a bottom, but it would hardly see a rebound at a fast pace," Liao said.

INFLATION, CONFIDENCE

Lian said the timing for further easing may arise in Q1 when a surge in factory-gate price is expected to slow with the help of regulatory controls on coal prices, which helped boost the PPI to a 26-year high in October, see: MNI: Surge In China Factory Prices Needs PBOC Credit Expansion.

But Lian cautioned that consumer prices next year are expected to rise on higher prices for pork, a staple food, and easier conditions on property commerce are still needed.

Relaxing controls on property and mortgage loans, as well as permission for developers to issue more bonds will boost overall confidence among buyers and suppliers to the sector, said Lian, who has called for such steps over the past few months.

Liao, also a former official at the State Planning Commission, however said the short-term purpose of curbing the overheated real estate market since last year has been reached, and house sale volumes and prices should stabilise.

He stressed that regulators would insist on tight controls for property in the long run to promote a healthy property market and more equitable economic development.

But one advisor cautioned there are other factors that affect M1 and that bear watching now.

A more cashless society and the upcoming digital yuan will change M1 flows over the longer-term, said Xu Hongcai, deputy director of the Economic Policy Commission of the China Associate of Policy Science.