Cheung Kong Graduate School of Business 2024-05-20 17:44 Beijing
China’s first quarter financial data was released last month. Data such as money supply, new RMB loans, and the increase in social financing scale all maintained steady growth. Among them, the market is paying more attention to "the total amount of m2 exceeds 300 trillion yuan".
Professors Ouyang Hui, Professor Cao Huining, and Ye Dongyan from the Cheung Kong Graduate School of Business recently published a signed article on the ft Chinese website, saying that the main reason for the large scale of China's m2 is that we rely more on indirect financing through banks, and bank assets account for 30% of financial assets. most.
The higher the m2/gdp ratio, the lower the efficiency of broad money in driving the economy. We should encourage the development of direct financing markets such as stocks and bonds, thereby reducing the growth rate of m2 and improving the efficiency of broad money.
Author | Ye Dongyan Ouyang Hui Cao Huining
Source | ft Chinese website
html On April 12, the central bank released a first quarter financial statistics report. The data showed that at the end of March 2024, the balance of broad money (m2) was 304.80 trillion yuan, a year-on-year increase of 8.3% . In the first quarter of 2024, China's nominal GDP grew by 4.2%, and the growth rate of broad money was higher than GDP.The scale of China's broad money is larger than that of the United States, the Eurozone and the United Kingdom combined, and it is growing at a high rate. As a result, some people in the market believe that China is conducting "quantitative easing." In fact, the main reason for the large scale of China m2 is that the financial system is different. We rely more on indirect financing through banks. Bank assets account for the majority of financial assets. This does not mean that China is engaged in "quantitative easing". .
However, the m2/gdp ratio is getting higher and higher, indicating that the efficiency of broad money in driving economic growth is getting lower and lower. We should encourage the development of direct financing markets such as stock markets and bond markets, thereby reducing the growth rate of m2 and improving the efficiency of broad money .
Many people believe that the most important or even the only indicator to judge the over-issuance of currency is the inflation rate. However, China does not have long-term inflation and the RMB does not continue to depreciate. Therefore, they believe that China does not have over-issuance of currency. However, in addition to inflation, whether asset prices are in bubbles is also an important indicator of whether currency is over-issued, and domestic real estate prices have experienced a substantial increase.
In addition, the weight of living expenses in China's price index is relatively low, and it only reflects the increase in rents rather than house prices. In addition, the RMB is not completely freely convertible, and the RMB exchange rate cannot fully and truly reflect the value of the RMB relative to other currencies. Therefore, we cannot believe that there is no over-issuance of RMB.
01
China's m2 is very large
China's m2 is an indicator of broad money supply, including cash in circulation, unit deposits, personal deposits and other deposits that can be converted into cash . Among them, in March 2013, China's m2 scale exceeded 100 trillion yuan for the first time, which took 63 years and 6 months (counting from October 1949); in January 2020, m2 exceeded 200 trillion yuan, which took 6 years 10 months; in March 2024, m2 exceeded 300 trillion yuan, which took 4 years and 2 months, and the latest value was 304.80 trillion yuan.
Chart 1 is China’s m2 scale from 2000 to 2024.
Chart 1: China’s M2 scale from 2000 to 2024
Source: ceic
The broad money of the United States and China is m2, while the euro area, Japan, India and the United Kingdom use m3 as broad money. China's broad currency is US$42.21 trillion, far exceeding the US$20.76 trillion of the United States. It is larger than the United States, the Eurozone and the United Kingdom combined, and also exceeds the combined level of the United States, Japan, the United Kingdom and India. Japan and China have the highest proportion of broad money in GDP, both exceeding 200%, while the United States and India have relatively lower proportions.
Chart 2 is a comparison of the broad money scale of various countries. GDP is the data in 2023, China's broad money is the data in March 2024, and other economies are the data in February.
Chart 2: Comparison of the broad money scale of various countries
Source: ceic, https://fred.stlouisfed.org
The difference from China's m2 is that the United States' m2 does not include large (i.e., more than 100,000 US dollars) corporate time deposits. In September 2009, the scale of China's M2 exceeded that of the United States' M2; in November 2010, the scale of China's M2 exceeded the scale of the United States' M2 plus time deposits.In March 2024, the M2 scale of China and the United States was US$42.21 trillion and US$20.84 trillion respectively. China's M2 was twice that of the United States.
Chart 3 is a comparison of the m2 scale between China and the United States from the beginning of 2000 to February 2024.
Chart 3: Comparison of m2 scale between China and the United States from January 2000 to February 2024
Source: ceic
During the COVID-19 epidemic (March 2020 to February 2022), the year-on-year growth rate of m2 in the United States was higher than that in China. At other times, the year-on-year growth rate of US m2 is lower than that of China. Starting from December 2022, as the Federal Reserve raises interest rates and shrinks its balance sheet, the size of U.S. m2 is shrinking.
Chart 4 is a comparison of the year-on-year growth rates of m2 in China and the United States from the beginning of 2000 to February 2024.
Chart 4: Comparison of m2 year-on-year growth rates between China and the United States from January 2000 to February 2024
Source: ceic
The ratio of m2 to gdp reflects the degree of monetization of the economy. The ratio of China's m2 to gdp has always been significantly higher than that of the United States. In 2023, China's m2/gdp will reach 232%, which is about three times that of the United States (76%).
Chart 5 is a comparison of m2/gdp between China and the United States from 2000 to 2023.
Chart 5: Comparison of m2/gdp between China and the United States from 2000 to 2023
Source: ceic
In terms of absolute scale, China's broad money is larger than the United States, the Eurozone and the United Kingdom combined, and also exceeds the United States, Japan, the United Kingdom, The sum of broad money of the four Indian countries. In terms of growth rate, China's m2 is faster than the United States' m2 most of the time. In terms of relative scale to GDP, China's m2 is significantly higher than the United States' m2.
02
The reason why China's m2 is relatively large
Enterprise a needs to raise 1 billion yuan. It can borrow money from banks or issue bonds or stocks. If you borrow from a bank, then both sides of the bank's balance sheet will increase by 1 billion yuan at the same time. The asset side will increase corporate loans by 1 billion yuan, and the liability side will increase corporate deposits by 1 billion yuan. And this 1 billion yuan corporate deposit will be calculated. In m2, that is, m2 increases by 1 billion yuan.
The main reason for the large scale of China's m2 is that China relies more on indirect financing, that is, indirectly providing funds to enterprises and individuals through banks. The United States prefers direct financing, that is, providing funds to companies and individuals through the securities market.
Chinese bank assets account for a relatively high proportion of financial assets, reaching 62%, and the total asset scale is 5.36 times GDP; while U.S. stocks, bonds, and private equity account for a relatively high proportion of asset scale, accounting for 38%, 35%, and 35% respectively. 21%, bank assets only account for 14%, and the total asset size is 6.07 times that of GDP.
Charts 6 and 7 show the scale of financial assets in China and the United States in December 2023 respectively.
Chart 6: China’s asset size in December 2023 (unit: trillion yuan)
Chart 7: US asset size in December 2023
(unit: trillion US dollars)
Data source: wind, World Bank, China Securities Investment Fund Industry Association, simfa, fred.stlouisfed.org, U.S. sec "Private Equity Industry Statistical Report"; U.S. private equity uses 2023 q2 data, and other data is updated to December 2023
China's RMB and foreign currency loan scale is significantly higher than that of U.S. commercial banks Loan size. At the end of 2023, China's RMB and foreign currency loans were US$33.40 trillion, nearly three times the US commercial bank loans (US$12.15 trillion).
Chart 8 is a comparison of the scale of China’s RMB and foreign currency loans and the scale of loans of U.S. commercial banks from 2012 to 2023.
Chart 8: Comparison of China's RMB and foreign currency loan scale from 2012 to 2023
and US commercial bank loan scale
Source: National Bureau of Statistics, ceic, fedreserve.gov
Chinese enterprises rely on loan financing and are the demand side of funds, and funds The providers are residents. In the two years of 2020 and 2021, due to the epidemic, the U.S. government issued a large amount of subsidies to residents, and the savings rate of U.S. residents reached 15.86% and 11.67%. In other years, it has been less than 10% and averaged around 5%. The average savings rate of Chinese residents is around 20%, and it will exceed 30% in 2022 and 2023.
Chart 9 shows the household savings rate (i.e., the ratio of household savings to disposable income) in China and the United States from 2006 to 2023.
Chart 9: Comparison of household savings rates between China and the United States from 2006 to 2023
Source: ceic, fedreserve.gov
High savings will reduce the efficiency of the use of funds, that is, increase the value of m2/gdp. Resident C receives a salary of 10,000 yuan. If it is deposited directly into the bank, m2 will increase by 10,000 yuan, but GDP will remain unchanged. If resident C uses this 10,000 yuan to buy a computer, then merchant d will purchase it from manufacturer e. Manufacturer e will purchase raw materials from upstream manufacturers and reproduce a computer. The 10,000 yuan spent by resident c will become a purchase. The cost of materials, employees' wages, and the profits of merchant D and manufacturer E. Although this money will eventually be converted into bank deposits, that is, M2 will increase by 10,000 yuan, GDP will increase in the process and the efficiency of the use of funds will increase. , m2/gdp will decrease.
China and the United States differ in the extent of debt market development and types of debt. The U.S. bond market is huge, and the government and companies can raise funds by issuing various types of bonds, such as government bonds and corporate bonds. China's bond market is relatively new and is still developing in terms of government and corporate bond issuance. China’s bond market is much smaller than that of the United States. The size of the stock of Chinese government bonds and corporate bonds is much smaller than the size of the U.S. bond market (treasury bonds, corporate bonds, municipal bonds). At the end of 2023, China's bond size was US$14.21 trillion, approximately 1/3 of the US bond market size (US$41.18 trillion).
Chart 10 is a comparison of the bond stocks of China and the United States from 2012 to 2023.
Chart 10: Comparison of bond stocks between China and the United States from 2012 to 2023
Source: ceic, sifma
In terms of equity financing, American companies raise funds more through the issuance of stocks, including public offerings of stocks (IPO) and refinancing (SPO) wait. China is also gradually increasing the proportion of equity financing, but it is still relatively limited compared to the United States.
The market value of Chinese stocks (Shanghai Stock Exchange + Shenzhen Stock Exchange) is much smaller than the market value of U.S. stocks (New York Stock Exchange + nyse). At the end of 2023, China's stock market value was US$10.89 trillion, which was 22% of the US stock market value (US$48.94 trillion).
Chart 11 is a comparison of the stock market values of China and the United States from 2012 to 2023. China's stock market is much smaller than that of the United States.
Chart 11: Comparison of stock market values between China and the United States from 2012 to 2023
Source: ceic, sifma
China’s bond issuance is smaller than that of the United States. The issuance of Chinese bonds (government bonds and corporate bonds) is smaller than the issuance of U.S. bonds (treasury bonds, corporate bonds, municipal bonds). In 2023, China's bond issuance will be US$1.58 trillion, which is 30% of US bond issuance (US$5.35 trillion).
Chart 12 is a comparison of bond financing between China and the United States from 2013 to 2023.
Chart 12: Comparison of bond financing between China and the United States from 2013 to 2023
Source: ceic, sifma
Chinese stock issuance is smaller than that of the United States. Excluding 2022, the scale of equity financing of Chinese non-financial enterprises is smaller than the scale of equity financing of the United States (IPO+SEO+preferred stock). In 2023, China's non-financial corporate equity financing will be US$112 billion, and US equity financing will be US$139 billion.
Chart 13 shows the scale of stock financing in China and the United States from 2013 to 2023.
Chart 13: Comparison of stock financing between China and the United States from 2013 to 2023
Source: ceic, sifma
Relatively speaking, China relies more on indirect financing, while the United States prefers direct financing . Most of China's financial assets are bank assets, while stocks, bonds, and private equity assets account for the majority of U.S. financial assets. This is the main reason why the scale of China's m2 is higher than that of the United States.
In addition, the breadth and depth of financial markets will also affect the velocity of currency circulation. The purpose of creating many financial instruments is to revitalize existing assets and improve asset liquidity. The effect is to increase the velocity of currency circulation . For example, in traditional commercial bank credit operations, a sum of funds is issued by the bank as a housing mortgage loan. This debt asset lacks liquidity, and the principal plus interest will be gradually recovered within 20 years or even longer.
However, MBS (mortgage-backed securities) can package many of these mortgage loan assets and sell them to professional institutions for the issuance of MBS, and recover funds early for another round of mortgage loan business.According to SIFMA statistics, by the end of 2023, the U.S. MBS market size will be approximately US$12 trillion, while my country’s MBS market size will be less than RMB 2 trillion.
03
Is China's currency over-issuance?
China's m2 is absolutely large in scale, has a high growth rate and has long exceeded the GDP growth rate. The value of m2/gdp continues to rise, causing people to worry about the over-issuance of currency. Currency over-issuance usually refers to a situation where the money supply exceeds the actual demand of the economy.
Over-issuance of money usually leads to inflation, because too much money supply drives up prices. Therefore, the level of inflation is an important indicator for judging excessive currency issuance. China's price index is not rising rapidly, and CPI has not continued to be higher than that of the United States. In fact, China's inflation rate has been below 3% since 2021, and at the end of 2023, China even showed signs of deflation; while the United States has experienced a round of inflation, with the CPI in June 2022 once exceeding 9%.
Chart 14 shows the comparison of inflation rates between China and the United States from the beginning of 2000 to March 2024.
Chart 14: Inflation rates between China and the United States from 2000 to March 2024
Source: ceic
If a country’s currency is over-issued, its currency will depreciate relative to the currencies of other countries. The RMB has not continued to depreciate. For example, in early 2000, the exchange rates of the US dollar and the Japanese yen against the RMB were 8.28 and 0.0788 respectively. In March 2024, one US dollar and one yen were exchanged for 7.10 yuan and 0.0472 yuan respectively.
Chart 15 is the central parity rate of the RMB against the US dollar, Japanese yen, euro and pound from the beginning of 2000 to March 2024.
Chart 15: 2000-March 2024
The central parity rate of the RMB against the US dollar, Japanese yen, euro and pound
Source: ceic
In the case of excessive currency issuance, funds will flow into the asset market, driving up asset prices.
Therefore, whether there is an asset bubble is often an important indicator for judging whether a currency is over-issued. Housing prices in first-tier cities in China have experienced a period of rapid growth since 2008. Taking Beijing as an example, housing prices reached a peak in May 2023, an increase of 204.6% from the beginning of 2008, and then began to decline; while Shenzhen's housing prices reached a peak in May 2021, an increase of 325.5% compared with the beginning of 2008. U.S. housing prices gradually increased after the global financial crisis, but the increase was significantly lower than that in China. Compared with the beginning of 2008, U.S. housing prices increased by 76.2% in May 2021 and by 110.6% in May 2023.
Chart 16 is a comparison of housing prices in first-tier cities in China and the U.S. housing price index from the beginning of 2008 to March 2024.
Chart 16: Comparison of China's first-tier cities
and the US housing price index from the beginning of 2008 to February 2024 (January 2018 = 100)
Source: wind
Many people believe that the most important indicator to judge whether currency is over-issued is price. If there is no sustained inflation, then it can be said that the economy is not over-issuing money. China has no long-term inflation, the RMB has not continued to depreciate, and the Shanghai Composite Index has been hovering at 3,000 points all year round. Therefore, many people will think that the RMB is not over-issued.
However, China's real estate prices have experienced rapid and substantial increases for a long time. Although they have declined in the past two years, the cumulative increase is still much higher than the national housing price index.
In addition, food accounts for 30.5% of the weight in China's cpi, and living expenses (rent or own property converted into rent) only have a weight of 17.5%. On the contrary, the weight of living expenses in the US CPI is 32.39%, and the weight of food is 13.99%.
In other words, living expenses account for a low proportion of China's CPI, and they reflect rent increases rather than house price increases.
Therefore, China's cpi does not reflect the rise in housing prices well. The RMB implements a managed floating exchange rate system rather than being fully convertible. Therefore, the RMB exchange rate does not necessarily truly reflect the value of the RMB relative to other currencies. To sum up, we cannot conclude that the RMB is not over-issued.
04
Summary
China's m2 is large both in absolute scale and relative to GDP, and its growth rate is high. The main reason for the large scale of China's m2 is that we rely more on indirect financing through banks, and bank assets account for the majority of financial assets.
m2 Although it has not caused serious inflation or sustained currency depreciation, the growth rate of m2 has been higher than the growth rate of gdp, and m2/gdp has been rising. This means that more and more m2 is needed to drive one unit of gdp, that is, broad money The efficiency of driving economic growth is getting lower and lower. Compared with indirect financing through banks, direct financing through securities markets such as stocks and bonds can effectively reduce the demand for m2 for economic development, thereby improving the efficiency of broad money in stimulating economic development.
