“M2 has grown so fast in China not just because the central bank has been issuing a lot of renminbi, but also because the state-owned banking system has lent and relent those renminbi with encouragement from the government, creating a multiplier effect….The Federal Reserve pays little attention to money supply measures, since they do not provide much guidance to setting monetary policy.” The New York Times, January 16, 2012
“Based on my study, I believe the Fed’s decision in recent decades to ignore money supply totals, in establishing monetary policy, has been a huge mistake and a major cause of economic instability. Additionally, I believe that the 1970s requirement that the Fed focus equally on the goal of full employment (as well as stable prices) is a mistake that has also contributed to economic instability (and makes the Fed’s monetary policy decisions largely unaccountable, because they can claim that any action they take contributes to one or the other of these often conflicting goals). Please read my blog posting Statement #77, on November 6, 2013, for a more fulsome discussion of the money supply issue.” Mike Perry, former Chairman and CEO, IndyMac Bank
“When it comes to monetary stimulus, Zhou Xiaochuan, the longtime governor of the People’s Bank of China, has no rivals. The amount of money sloshing around China’s economy, according to a broad measure that is closely watched here, has now tripled since the end of 2006. China’s tidal wave of money has powered the economy to new heights, but it has also helped drive asset prices through the roof. Housing prices have soared, feeding fears of a bubble while leaving many ordinary Chinese feeling poor and left out.”, “With China Awash in Money, Leaders Start to Weigh Raising the Floodgates”, NYTimes, January 16, 2014
Key Excerpts From Nobel Laureate Milton Friedman’s “The Role of Monetary Policy”:
“How should monetary policy be conducted? The first requirement is that the monetary authority should guide itself by magnitudes it can control, not be ones that it cannot control. If, as the authority has often done, it takes interest rates or the current unemployment percentage as the immediate criterion of policy, it will be like a space vehicle that has taken a fix on the wrong star. No matter how sensitive or sophisticated its guiding apparatus, the space vehicle will go astray. And so will the monetary authority.
Accordingly, I believe that a monetary (money supply) total is the best currently available immediate guide or criterion for monetary policy.
It is a matter of record that periods of relative stability in the rate of monetary growth have also been periods of relative stability in economic activity, both in the United States and other countries. Periods of wide swings in the rate of monetary growth have also been periods of wide swings in economic activity. By making that course one of steady but moderate growth in the quantity of money, it would make a major contribution to avoidance of either inflation or deflation of prices.”
With China Awash in Money, Leaders Start to Weigh Raising the Floodgates
By KEITH BRADSHER JAN. 15, 2014
A visitor viewing the model of a new apartment complex in Wuhan, in central China. Darley Shen/Reuters
HONG KONG — Move over, Janet Yellen and Ben Bernanke. Step aside, Mario Draghi and Haruhiko Kuroda. When it comes to monetary stimulus, Zhou Xiaochuan, the longtime governor of the People’s Bank of China, has no rivals.
The latest data released by China on Wednesday show that the country’s rapid growth in money supply has continued. Mr. Zhou and his colleagues at the Chinese central bank have only begun the difficult and dangerous task of reining it in.
The amount of money sloshing around China’s economy, according to a broad measure that is closely watched here, has now tripled since the end of 2006. China’s tidal wave of money has powered the economy to new heights, but it has also helped drive asset prices through the roof. Housing prices have soared, feeding fears of a bubble while leaving many ordinary Chinese feeling poor and left out.
There are big differences, of course, between China and the major Western industrial powers. The Federal Reserve, the European Central Bank and the Bank of Japan are trying to prevent deflation and help their economies recover from the lingering consequences of the financial crisis and the Great Recession. They have little reason to fear inflation.
Source: People’s Bank of China; China’s National Bureau of Statistics; U.S. Commerce Department; Federal Reserve Board, via CEIC Data *Fourth quarter 2013 G.D.P. is estimated for China based on state media statements. ** Money supply is broadly measured M2.
The mechanics of China’s monetary policy stimulus are also different from the Fed’s quantitative easing. The Fed has been effectively creating money by buying bonds and other securities. The People’s Bank of China has been creating money to a considerable extent by issuing more renminbi to bankroll its purchase of hundreds of billions of dollars a year in currency markets to minimize the appreciation of the renminbi against the dollar and keep Chinese exports inexpensive in foreign markets; the central bank disclosed on Wednesday that the country’s foreign reserves, mostly dollars, soared $508.4 billion last year, a record increase.
Moreover, the rapidly expanding money supply reflects a flood of loans from the banking system and the so-called shadow banking system that have kept afloat many inefficient state-owned enterprises and bankrolled the construction of huge overcapacity in the manufacturing sector.
Cao Maolan, a real estate broker in Nanjing in east-central China, helped a young woman buy her first apartment seven years ago, a 650-square-foot unit for which she paid the equivalent of $60,000. The young woman sold it in less than two years for a 50 percent profit, Ms. Cao said, and has traded up to a bigger apartment every year since then, now living in a 2,150-square-foot apartment for which she paid $985,000, mostly in cash with the profits from previous deals.
“Everyone who bought property has done really well,” Ms. Cao said.
But young college graduates, whose numbers have quintupled in the last decade as China’s universities expand rapidly, worry that they may never be able to afford to buy a new home.
Zheng Yilong, a 22-year-old college graduate in Wuhan, an industrial hub of 10 million people in central China, is paid $575 a month in a low-level banking job with limited opportunities for raises. But he has found that even a 540-square-foot apartment on the outer edge of the metropolitan area, with a long commute, costs $98,400, or 14 years’ pay.
“I cannot even begin to imagine how I can earn and save enough to buy even a small unit here in Wuhan, so I don’t think about it — there is no solution,” he said in a telephone interview Wednesday.
The money supply and credit data released Wednesday morning show that the central bank has begun to tackle the problem, but only slowly. The broad measure of money supply, known as M2, grew 13.6 percent last year, barely less than its increase of 13.8 percent a year earlier, the Chinese central bank said in a news release.
This means the money supply is still charging well ahead of inflation-adjusted economic growth, which has been about 7.6 percent; the exact figure for the fourth quarter of last year is scheduled for release on Monday.
Growth in M2 almost reached 30 percent at the end of 2009, when China was using monetary policy to offset the effects of the global financial crisis. China has reduced the pace of money supply growth since then, but kept it well above the pace of economic growth throughout, which means it has done little to sop up the extra cash issued during the crisis.
The question now is whether the central bank can further slow the growth of credit and the money supply without causing a slump in housing prices or a sharp slowdown in the credit-dependent corporate sector. Even the very modest slowdown in money supply growth so far has already contributed to two sharp, but short-lived, increases in interbank interest rates in June and December, which roiled markets in China and around the world.
China’s central bank “is in a very difficult situation; it needs to tighten, but the whole system is not used to tightening, they are used to money printing,” said Shen Jianguang, a China monetary economist in the Hong Kong office of Mizuho Securities, a Japanese investment bank.
M2 encompasses money in circulation, checking accounts, savings accounts and certificates of deposit. It is the main money supply indicator watched by the People’s Bank of China in trying to balance the need for economic growth with the dangers of inflation.
M2 has grown so fast in China not just because the central bank has been issuing a lot of renminbi, but also because the state-owned banking system has lent and relent those renminbi with encouragement from the government, creating a multiplier effect.
China has also undergone a financial liberalization in the past five years that has accelerated the pace of lending. An extensive and loosely regulated shadow banking system has emerged, partly because of the willingness of regulators to allow banks to classify loans to new financing companies not as corporate loans but as interbank loans, for which little capital needs to be reserved.
The Federal Reserve pays little attention to money supply measures, since they do not provide much guidance to setting monetary policy. While the Fed’s ultra-low interest rates and extra monetary stimulus have helped revive the housing market and lifted the stock market, the broadly measured money supply has increased more slowly in the United States because American banks have been much more cautious about lending money.
Consumer inflation has not yet become a big problem in China: Falling commodity prices and widespread manufacturing overcapacity held down consumer inflation to 2.6 percent last year.
But asset price inflation, notably the country’s soaring real estate prices and corresponding decline in housing affordability, has been a constant worry for the authorities.
Hilda Wang contributed reporting.A version of this article appears in print on January 16, 2014, on page B2 of the New York edition with the headline: With China Awash in Money, Leaders Start to Weigh Raising the Floodgates.