Surging money supply equals credit boom

With the yuan’s relatively low market value and huge monthly exports, China’s money supply levels have been booming. Chinese M2 money supply growth increased 17.9 percent in August, following July’s 18.4 percent year-over year jump.

“[The massive money supply growth] is fueling a credit boom in China, which explains why investment is growing so fast,” says Virendra Singh, senior economist at Moody’s Economy.com.

Easy domestic credit conditions within China are fueling a building boom, which includes new factories, bridges, roads, and apartment buildings.

“Most of these assets have been built on credit,” Singh says. “There are roughly 7,000 banks in China and these are all controlled by regional governments. It is like turning the spigot on and borrowing money.”

Economists warn of potential vulnerability for the economy if the investment bubble bursts; the level of non-performing loans would likely increase.

“Basically, there is too much money chasing too few goods,” says Charmaine Buskas, economist at Moody’s Economy.com. “There have been signs of possible overheating in many sectors. Real estate is pricey, especially in Beijing and Shenzhen.”

Some have criticized the Bank of China for not raising monetary policy rates enough. In 2005, the rate for interbank loans stood at 2.86, while the current level comes in around 3.33 percent, says Singh. Given the 9.5 percent GDP growth rate, “basically they borrow money at the 5.6 percent lending rate and get a 9.5-percent return.”