**Breaking Trillions of Concerns**
It's no coincidence that M2 has surpassed the 100 trillion yuan mark. Interestingly, due to factors such as weak economic recovery, rising sovereign debt, and sluggish global trade growth, many major countries have adopted the banner of "quantitative easing." Although China didn't actively inject additional money, except during the financial crisis, the M2 balance has steadily climbed to 103.61 trillion yuan, up by 15.7%. This makes China’s M2 stock and growth rate among the highest in the world.
From 12 trillion yuan in 1999 to over 100 trillion in less than 15 years, the rapid expansion of M2 highlights the significant monetary policy actions taken. However, this surge in money supply doesn’t always align with the real economy, which has led to renewed debates about the M2/GDP ratio and concerns over over-liquidity. Some argue that excessive growth in China’s money and credit system may be contributing to current economic challenges.
The criticism surrounding M2 is often aimed at urging a more balanced approach. The Chinese central bank has shown increasing caution, and the concept of “neutral policy†has become more prominent. If the economy continues to grow at around 10% annually, M2 could easily surpass 200 trillion yuan by 2020.
On April 11, the central bank released data showing that at the end of March, the M2 balance reached 103.61 trillion yuan, a year-on-year increase of 15.7%, higher than the previous month and the same period last year. This reflects strong liquidity in the market. New RMB loans for the month totaled 1.06 trillion yuan, while total new social financing increased by 2.54 trillion yuan. Additionally, new deposits hit 4.22 trillion yuan, the highest in a single month.
This growth is primarily driven by an increase in new RMB loans and foreign exchange holdings. In the first quarter, RMB loans rose by 2.76 trillion yuan, and foreign exchange reserves continued to climb. These figures suggest that the central bank is still supporting economic activity through monetary measures.
Analysts from China Merchants Securities noted that the rise in M2 coincides with increased demand deposits and a rebound in enterprise investment willingness. While M2 growth is crucial for economic development, it has also raised concerns about “currency overshoot.†The M2-to-GDP ratio has exceeded 200%, compared to 187% in 2012, sparking discussions on its implications for the economy.
According to monetary theory, money supply is created in two stages: first by the central bank, then by commercial banks through deposit creation. A high savings rate and reliance on bank financing contribute to a high M2-to-GDP ratio. Since 1990, China’s M2 growth has averaged 21.1%, much faster than GDP growth.
The central bank attributes this rapid growth to ongoing economic reforms and increased monetization. As the economy becomes more market-oriented, more transactions are conducted in cash or digital forms, leading to higher money demand. Zhou Xiaochuan, former governor of the People's Bank of China, explained that the M2 growth rate is slightly higher than the sum of GDP and inflation growth, but remains within acceptable limits.
Haitong Securities’ chief economist Li Xunlei pointed out that when adjusting for statutory reserves, the M2-to-GDP ratio drops significantly, suggesting that the concern over excess liquidity might be overstated. However, he also warned that excessive credit growth could lead to inefficiencies and systemic risks, especially in sectors like real estate and infrastructure.
Financial sector reforms, including expanding direct financing and promoting interest rate liberalization, are underway. Meanwhile, fiscal reforms should focus on addressing real estate bubbles and income inequality. Despite the central bank’s reassurances, monetary policy is becoming increasingly neutral.
In the first quarter, new loans reached 2.76 trillion yuan, with annual credit growth expected to stay around 14.6%. While this supports economic growth, it also raises concerns about inflation and financial stability. The central bank has started tightening policy, shifting from reverse repos to positive repos to manage liquidity.
With CPI at 2.1% in March and signs of uncertainty in price trends, the central bank may consider tighter measures. Although interbank rates remain stable, the inflow of hot money suggests that future liquidity management will likely rely on positive repos, with the possibility of interest rate hikes in the second half of the year.
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