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Journalist from the National Business Daily noted that the academic world has in fact started analysis and discussion on “liquidity trap” since last year. But on the official level, it is not the first time that the above statement resounded.
At the financial statistics conference for the first half year held yesterday (July 18), Sheng Songcheng, head of the financial survey and statistics department of the PBOC, also referred to the difference between M1 and M2. Sheng pointed out that enterprises hold a lot of money for investment, but have not find the directions for investment yet, thus huge amount of money is included in their current accounts.
Sheng explained that M1 is the total of M0 and corporate current deposit, and the latter accounts for a major part. Currently, M1 exceeds 4.4 trillion yuan, but M0 is only slightly more than 6 trillion yuan. The journalist roughly estimated that capital kept in corporate current accounts amounted to about 3.8 trillion yuan.
Main reason: enterprises hold money for investmen
“There are slight signs that the current monetary policy has fallen into liquidity risk,” Sheng said openly at the aforesaid forum on July 16.
As a matter of fact, since last October, the gap of growth of M1 and M2 has been expanding. The latest data from the central banks shows that as at the end of June 2016, the broad money (M2) increased by 11.8 percent, while the growth of M1 hit 24.6 percent. The difference of the two has broadened from 0.5 percentage points last October to 12.8 percentage points this June.
In this regard, Sheng believes that it is primarily due to enterprises holding money for investment. Large amount of money flows to enterprises, but enterprises have not yet find the appropriate directions for investment. Therefore, the money is kept in the current accounts. In addition, decline of opportunity cost for enterprises to hold current deposit and impact of local government’s debt replacement on M1 also result in the gap of growth of M1 and M2.
“After money is released, capitals do not necessarily flows to real economy, and instead it pushed up the prices of assets such as real estate,” Li Chao, chief macro economist with research institute of Huatai Securities said in an interview withNational Business Daily.
During the process of utilizing savings to purchase home by individuals, capitals turned from corporate and household savings into current deposit of real estate enterprises. Even before the investment of real estate, the money has become corporate current deposit in M1. Thus the difference between M1 and M2 formed.
In addition, in other industries, enterprises may also hold money for investment, resulting in the considerable inventory of M1. In particular, enterprises’ cash flow recovered as industrial profits have substantially picked up this year, and as there are not any projects with good return on invested capital in the future, some enterprises choose to hold money for investment, which later transferred into current deposit.
The growth of M1 surpassing M2 is mainly caused by the significant growth in non-financial current deposit, and partly due to the slight increase of M0 growth and percentage of current deposit of government agencies and organizations, coupled with the rapid growth of household saving, as Cai Hao, researcher from the research institute of Evergrowing Bank Co., Ltd. pointed out in an article.
Journalist ofNational Business Dailyalso noted that the central bank’s latest data shows that as of the end of June, the balance of narrow money (M1) and money in circulation (M0) were 44.36 trillion yuan and 6.28 trillion yuan respectively. On this basis, corporate current deposit has reached nearly 38 trillion yuan.
Sheng Songcheng: monetary policy requires complement from fiscal policy
It should be noted that in history, rapid growth of M1 is always accompanied by economic growth. But the current situation is quite the opposite. It is the first time that this phenomenon occurred in China in nearly 20 years.
Looking back to two periods when M1 were abnormal, rapid M1 growth has not only sent higher the asset prices represented by house, but also triggered long-period of inflation. Subsequently, the central bank tightened the monetary policy, the bench mark interest rate and reserve requirement ratio were increased, and relevant authorities tightened the policies on real estate.
And now the question is, as the officials have come to the judgment of “liquidity trap”, what will be the impacts on China’s monetary policies in the future?
“The central bank prefers fiscal policy to play a greater role in stabilizing the economy, as the monetary policy has deficiencies in stabilizing growth: firstly, time delay; secondly, effectiveness, as this money may flow to real economy, or converge on assets, resulting in the bulb of assets prices rather than stimulating economic growth. As a result, the central bank has been held the view that China still need to further improve the fiscal deficit ratio,” Li Chao said in an interview withNational Business Daily.
It is also worth noting that Sheng also indicated at the aforesaid forum that the effect of monetary policy is limited, and it requires the complement from proactive fiscal policy.
Firstly, proactive fiscal policy has more advantages. It share the same goal with “replacing business tax with value-added tax”, namely, to ease the tax burden of enterprises. Secondly, moderately increase government debt issuance, to increase fiscal deficit ratio. According to calculation, China’s fiscal deficit ratio could be improved to 4 percent to 5 percent. The combination of fiscal policy and monetary policy can drive economy growth and maintain sound and rapid economic development.
Cai predicts that the central bank will continue to keep monetary policy moderate. Of course, no change in steady monetary policy does not mean no slight adjustment, but what matters is what and how to adjust. Under the economic downturn, stabilizing economic growth is surely the purpose of monetary policy, and easing monetary policy takes prominent effect in stimulating investment.
But Cai also expresses that price “bubble” hidden behind real estate market and potential risk on inflation warned by history inevitably require that the central bank should be alert and pay attention to preventing inflation (target of monetary policy) and preventing risk (target of the central bank). It should stabilize economic growth when economic growth slows down and prevent inflation amid inflation risk. It should guard against financial risks derived from bursting of asset price bubbles and provide supply-side structural reform with proper monetary environment. This might be direction for adjustment in moderate monetary policy in a future period.
Lian Ping, chief economist of Bank of Communications, points out in an article that in view of different growth in M1 and M2, there are certain speculation behaviors in economic operation. Future monetary policy should stay neutral, flexible and moderate, which may be better for steady operation of economy and finance.
“Structural problems should be largely solved by flexible application of structural adjustment of financial industry and policy tools such as MLF and PSL.”
(APD/XH FINANCE)
