China’s money supply growth exceeded the government target for a third month and lending accelerated along with a drop in household deposits has consequently mounting pressure on the central bank to raise interest rates. Annual growth in China’s broad M2 measure of money supply eased to 17.1 percent in April against expectations. The central bank had earlier slowed M2 growth from a highest of 19.2 percent in January 2006 by raising banks’ required reserves seven times and interest rates three times in just over a year.
Money supply measured as M2, which includes cash and all deposits, shot up 17.1 percent in April from a year earlier, the People’s Bank of China informed on its Web site after gaining 17.3 percent in March. The latest figure has beaten the 17 percent median estimate of 19 economists surveyed by the central bank’s 2007 target of 16 percent. Interestingly, outstanding yuan loans also increased more rapidly last month compared to March as tighter lending rules and higher borrowing costs have proved to be unsuccessful to restrain investments in factories and real estate.
Household deposits have been on declining path that witnessed deposits slashed by $21.7 billion in April, compared with an increase of $7.9 billion at the same time last year, the central bank said in a statement on its website. In the meantime, household loans went up 123.6 billion yuan, a year-on-year increase of 63 billion yuan, according to the bank. However, in a condition when there is a lack of a considerable jump in consumption, analysts believe that a considerable part of deposits and loans may have directed into the stock market which has increased more than 50 percent so far this year on top of a 130 rally in 2006.
As a matter of fact, M2 growth remained well above the People’s Bank of China’s full-year target of 16 percent. Additionally, banks have extended 422.0 billion yuan in new loans in April, the central bank said in its report. And the latest data shows that surge in lending activity brought new yuan loans for the first four months to about 1.85 trillion yuan, marking more than half the total for all of last year.
Zhu Jianfang, chief economist at China Securities in Beijing has said, ‘Although there were no big pickups in the money supply and loan growth, they are still at very high levels, leaving the central bank with little room for comfort.’ He further added that another interest rate rise was possible by the end of the month if April consumer inflation figures, due to be released on Monday, come in higher than 3 percent and if fixed-asset investment continued to grow at a rapid clip.
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