Tom recently cautioned that China represented ‘a bubble driven by easy credit, with resources being misallocated on a grand scale’. Similarly, Johan Norberg has argued that ‘China’s money supply is now larger than America’s even though its economy is a third of the size’, warning that China may be driven by ‘pure speculation’ and ‘the next bubble to pop’. However, other than M1 data, a broader comparison of monetary aggregates is less worrying for China.
China/US Monetary Comparison
China’s narrow money supply is more than double US levels. However, China’s broad money supply is below US levels and its volume of credit available is one-fourth of the US level, reflecting far lower bank gearing. China’s stock market is also only one-third the size of its US counterpart, as measured by stock market capitalisation.
Moreover, nominal GDP undervalues China’s national output, as the value of the yuan is artificially depressed. A purchasing power parity estimate of GDP increases China’s output by some 70%. Rather than the stock, it is the change in monetary aggregates that should cause genuine concern. China’s money supply has grown swiftly, with M1 rising 18% and M3 and credit outstanding each rising 12% in 2010. This continued growth comes despite government efforts, through several policy measures, to slow expansion in the financial sector.
There is specific concern about the overall level of lending, which had average growth in 2008/9 of 18.6%. New loans in the first 10 months of 2010 totalled US$1.1 trillion (6.9 trillion yuan), and the 2010 total was expected to breach its target of US$1.2 trillion (7.5 trillion yuan).
Looking at China’s monetary aggregates, there are grounds for concern over the rapid growth of both narrow and broad money, and credit provided during 2010, on top of rapid credit growth in the two prior years, and the questionable success of monetary policy measures to control excessive expansion.
Brian Lawson is Special Consultant to Exclusive Analysis.