Some new numbers on money supply have come out. Total M2 is 38.4 trillion RMB, having grown 18.5% from last July. In June it was up 17.1% year on year, and the PBoC claims it is trying to cap growth at 16%. M1 is also up substantially year on year -- 20.9%.
There were 231.4 billion RMB of new loans in July, bringing the total for this year to 2.77 trillion RMB. According to the South China Morning Post today this is equal to 87% of all of last year's loans. During the first seven months of 2006 total new loans amounted to 2.34 trillion RMB, so new loans year to date are 18% higher this year than last year.
Total loans in the banking system are 26.75 trillion RMB, so loan growth year to date has been 11% for the first seven months of the year (or 21% on an annualized basis, if we were to assume the same level of new loans over the rest of the year). I don't have July month-end numbers but my estimate for 12-month GDP is 19.9 trillion RMB (roughly $2.6 trillion), so that total loans are equal to about 135% of GDP.
What these very dry numbers indicate is that, at least for people like me who believe that monetary policy in China is in trouble, things continue to deteriorate. Money growth is excessive (and sterilization is pretty ineffective) and loan growth is worse. This expansion in credit ends up mostly in the expansion of productive facilities, and so growth in production will continue to outstrip growth in consumption.
A country's trade surplus is simply the excess of its production over its consumption, so as production surges, China's trade surplus is stuck on "accelerate". This means that the trade surplus will continue to stay high, or grow, sucking in even more money into China which the PBoC must monetize, so causing further money supply and loan growth, which brings us right back to the beginning of the process.
Of course as these numbers grow, the pressure for speedier pace of revaluation (or a sudden maxi-revaluation, which is what I expect eventually to happen) also increases, and speculative inflows add to the pressure.
I should point out that speculative inflows are not necessarily, or even mainly, caused by the proverbial nasty speculator. Last night a friend who works in the Spanish consulate in Beijing told me that since her salary is set in dollars (neither she nor I could figure out why the Spanish consulate in Beijing would set salaries in dollars), the appreciating RMB was eroding her purchasing power and, in order to protect her income, she was trying to convert as many dollars as possible into RMB. She, and millions of people like her trying to protect their savings or income (and me too, I should add), are one of the biggest sources of speculative inflows. It would be hard to stop this without causing a great deal of hardship.
Michael Pettis is a professor at Peking University's Guanghua School of Management, where he specializes in Chinese financial markets. He has also taught, from 2002 to 2004, at Tsinghua University’s School of Economics and Management and, from 1992 to 2001, at Columbia University’s Graduate School of Business. He is a member of the board of directors of ABC-CA Fund Management Co., a Sino-French joint venture based in Shanghai.
Pettis has worked on Wall Street in trading, capital markets, and corporate finance since 1987, when he joined the Sovereign Debt trading team at Manufacturers Hanover (now JP Morgan). Most recently, from 1996 to 2001, Pettis worked at Bear Stearns, where he was Managing Director-Principal heading the Latin American Capital Markets and the Liability Management groups. He has also worked as a partner in a merchant banking boutique that specialized in securitizing Latin American assets and at Credit Suisse First Boston, where he headed the emerging markets trading team. Besides trading and capital markets, Pettis has been involved in sovereign advisory work, including for the Mexican government on the privatization of its banking system, the Republic of Macedonia on the restructuring of its international bank debt, and the South Korean Ministry of Finance on the restructuring of the country’s commercial bank debt.
Pettis is a member of the Institute of Latin American Studies Advisory Board at Columbia University as well as the Dean’s Advisory Board at the School of Public and International Affairs. He is the author of several books, including The Volatility Machine: Emerging Economies and the Threat of Financial Collapse (Oxford University Press, 2001). He received an MBA in Finance in 1984 and an MIA in Development Economics in 1981, both from Columbia University.
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December, 2007
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