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China’s broad money （M2） stood at 99.86 trillion yuan （$16.08 trillion） at the end of February， a year-on-year increase of 15.2 percent. The data released by the People’s Bank of China， the country’s central bank， has drawn the attention of economists from home and abroad. Since China’s amount of M2 ranks first in the world—1.7 times the figure in the United States and almost one fourth of the world’s money supply—many say that China’s money issuance pushes up global inflation.
Is China over-issuing money？ Is China the cause of global inflation？ Will China change its monetary policy under the pressure of world opinion？ All these questions are testing policymakers from China’s central bank.
Oversupply
At the First Nobel Economists Summit of China held in Beijing on March 18-19， famous Chinese economist Cheng Siwei said once again that China is over-issuing money and warned against risks of excessive money supply in the nation.“The biggest impact of money oversupply on the economy is inflation，” he said.
Li Daokui， Director of the Center for China in the World Economy at Tsinghua University， is one who believes that “there is a serious oversupply of money in China.” China’s M2 soared from 18.5 trillion yuan （$2.98 trillion） at the end of 2002 to the present 99.86 trillion yuan（$16.08 trillion）. Globally， China’s M2 ranks first. In comparison， M2 in the United States， which ranks second， only stood at $9 trillion. China surpassed the United States in M2 in 2009 when China was implementing its 4-trillionyuan （$637.96 billion） stimulus package. Even in 2012 when China tightened its monetary policy， its money supply was still high. Its newly added M2 accounted for 46.7 percent of the world’s total.
“An excessively large money stock will bring some risks， such as high inflation， asset price bubbles and the outflow of capital，” Li said.
The ratio of M2 to GDP is a reference for the over-issuing of money by some economists. Zhu Baoliang， Director of the Department of Economic Forecast of the State Information Center， says in China， the ratio has kept rising for years. In comparison with figures in other countries or its previous figures， China is printing money on a large scale. At present， China’s M2-to-GDP ratio is 200 percent， while the ratio is only 60 percent in the United States.
Zhu says China has paid dearly for overissuing money during its period of stellar economic growth. Ordinary people have suffered in particular： The high inflation rate and high housing prices swept away the benefits they would normally get from rapid economic growth. A moderate amount
Central bank governor Zhou Xiaochuan denies over-issuing exists in China. “Normally in countries with a high savings rate， M2 is often high. China’s savings rate is among the highest worldwide，” Zhou said at a press conference during the First Session of the 12th National People’s Congress in March. He added that China has properly controlled its money supply during the past few decades.
Yang Tao， a research fellow at the Institute of Finance and Banking of the Chinese Academy of Social Sciences， thinks it is not reasonable to compare China’s M2 with that of other countries because renminbi is not yet fully convertible. For this reason， the renminbi supply created through domestic economic development store up within the country. Furthermore， China’s massive trade surplus as well as foreign exchange reserves brought into the country via foreign investment must enter the domestic market after changing into renminbi， further increasing the supply of renminbi in China. However， in Europe， the United States and Japan， whose currencies are international reserve currencies， the increased money supply brought by an eased monetary policy can flow to other countries via international trade and overseas investment， reducing stockpiles of domestic currencies in their countries. As a result， China’s money supply is higher than those in developed countries.
Moreover， since China is experiencing the process of economic monetization， its money demand has become higher. Developed countries—after a long process of development—have been at high and steady levels of monetization.
In China， since the reform and opening up， various factors of production are allocated by the market. Assets such as land and houses， which were never or seldom priced， are traded on the market and have had their values monetized， hence increasing currency demand. Since China’s monetization process has begun later than in developed countries， it needs to advance monetization much more intensively than developed countries had done within more than a century， accelerating the speed of M2 growth.
Niu Wenxin， chief commentator of China Central Television’s securities channel， thinks it is misleading to the public to say China over-issues its currency. Nominal GDP should be used to compare M2 and GDP， he says. However， the GDP figures China releases are price-deducted ones. Moreover， factors taken into consideration should include demand for the currency brought by price hikes and asset monetization， its cross-border flows as well as renminbi in the hands of foreigners. Niu says China’s central bank has been deciding the M2 growth by adding 2-3 percentage points to the sum of the country’s GDP and CPI growth rates. This is a reasonable method. For example， the Chinese Government expects that the GDP will grow by 7.5 percent this year and CPI by 3.5 percent， therefore the central bank should decide that a growth rate of 13 percent for M2 is suitable for the economy. A small money supply will slow down economic growth， but a large one will push CPI growth too high and intensify inflation.
Niu adds that in fact China’s money supply is linked up with the U.S. dollar. Since the United States has been easing its monetary policy， China and other countries have to print more bank notes. Global money growth starts in the United States， and the main reason for global price hikes is the U.S. quantitative easing.
Serving the economy
However argued， China’s monetary policy will only change to suit the demands of its economy， because the monetary policy has four targets： maintaining low inflation， promoting economic growth， increasing employment and maintaining the balance of international payments.
According to Zhou， CPI figures are the top consideration for China’s monetary policy. “The 13-percent growth of M2 in 2013 indicates a sound or a neutral monetary policy. Compared with 2012 or 2011， 13-percent growth has been obviously tightened， and this is to maintain price levels，” he said.
In fact， the central bank has been practicing such a principle. The National Bureau of Statistics released February CPI figures on March 9. CPI grew by 3.2 percent in February compared with the same period last year， which was 1.2 percentage points higher than in January. This indicated signs of inflation. On the same day， the central bank intensified efforts in reducing money supply. By March 21 it had withdrawn 1.01 trillion yuan（$161.08 billion） of cash from the market.
Mei Xingbao， a consultant with China Orient Asset Management Corp.， says this year’s economic growth target requires a prudent monetary policy. After CPI grew higher than expected in February， the government has heightened vigilance against inflation. Since high inflation remains a possibility and economic recovery continues， the liquidity of renminbi will be weaker in the second quarter than in the first.
According to Yang， moderate inflation brought on by labor price hikes may be acceptable in an open economy and will be conducive to facilitating sustainable economic growth. Therefore the central bank， when paying close attention to inflation pressure， should analyze the reason for inflation so as to decide a new standard for“modest inflation” instead of merely taking the 3.5-percent CPI growth as the standard to adjust money supply.
“We have all seen that every year the central bank issues its money supply target for the next year， but in the end the real supply is all quite different from the set targets，” said Yang.
He thinks China should urgently improve the transparency of its monetary policy in order to reduce controversy over whether China is over-issuing money.
“A transparent monetary policy has become a trend practiced by the central banks of various countries， for it can satisfy the public demand for policy disclosure，” Yang said. “In addition， the central bank itself can affect expectations of market participants by improving access to information.”
Is China over-issuing money？ Is China the cause of global inflation？ Will China change its monetary policy under the pressure of world opinion？ All these questions are testing policymakers from China’s central bank.
Oversupply
At the First Nobel Economists Summit of China held in Beijing on March 18-19， famous Chinese economist Cheng Siwei said once again that China is over-issuing money and warned against risks of excessive money supply in the nation.“The biggest impact of money oversupply on the economy is inflation，” he said.
Li Daokui， Director of the Center for China in the World Economy at Tsinghua University， is one who believes that “there is a serious oversupply of money in China.” China’s M2 soared from 18.5 trillion yuan （$2.98 trillion） at the end of 2002 to the present 99.86 trillion yuan（$16.08 trillion）. Globally， China’s M2 ranks first. In comparison， M2 in the United States， which ranks second， only stood at $9 trillion. China surpassed the United States in M2 in 2009 when China was implementing its 4-trillionyuan （$637.96 billion） stimulus package. Even in 2012 when China tightened its monetary policy， its money supply was still high. Its newly added M2 accounted for 46.7 percent of the world’s total.
“An excessively large money stock will bring some risks， such as high inflation， asset price bubbles and the outflow of capital，” Li said.
The ratio of M2 to GDP is a reference for the over-issuing of money by some economists. Zhu Baoliang， Director of the Department of Economic Forecast of the State Information Center， says in China， the ratio has kept rising for years. In comparison with figures in other countries or its previous figures， China is printing money on a large scale. At present， China’s M2-to-GDP ratio is 200 percent， while the ratio is only 60 percent in the United States.
Zhu says China has paid dearly for overissuing money during its period of stellar economic growth. Ordinary people have suffered in particular： The high inflation rate and high housing prices swept away the benefits they would normally get from rapid economic growth. A moderate amount
Central bank governor Zhou Xiaochuan denies over-issuing exists in China. “Normally in countries with a high savings rate， M2 is often high. China’s savings rate is among the highest worldwide，” Zhou said at a press conference during the First Session of the 12th National People’s Congress in March. He added that China has properly controlled its money supply during the past few decades.
Yang Tao， a research fellow at the Institute of Finance and Banking of the Chinese Academy of Social Sciences， thinks it is not reasonable to compare China’s M2 with that of other countries because renminbi is not yet fully convertible. For this reason， the renminbi supply created through domestic economic development store up within the country. Furthermore， China’s massive trade surplus as well as foreign exchange reserves brought into the country via foreign investment must enter the domestic market after changing into renminbi， further increasing the supply of renminbi in China. However， in Europe， the United States and Japan， whose currencies are international reserve currencies， the increased money supply brought by an eased monetary policy can flow to other countries via international trade and overseas investment， reducing stockpiles of domestic currencies in their countries. As a result， China’s money supply is higher than those in developed countries.
Moreover， since China is experiencing the process of economic monetization， its money demand has become higher. Developed countries—after a long process of development—have been at high and steady levels of monetization.
In China， since the reform and opening up， various factors of production are allocated by the market. Assets such as land and houses， which were never or seldom priced， are traded on the market and have had their values monetized， hence increasing currency demand. Since China’s monetization process has begun later than in developed countries， it needs to advance monetization much more intensively than developed countries had done within more than a century， accelerating the speed of M2 growth.
Niu Wenxin， chief commentator of China Central Television’s securities channel， thinks it is misleading to the public to say China over-issues its currency. Nominal GDP should be used to compare M2 and GDP， he says. However， the GDP figures China releases are price-deducted ones. Moreover， factors taken into consideration should include demand for the currency brought by price hikes and asset monetization， its cross-border flows as well as renminbi in the hands of foreigners. Niu says China’s central bank has been deciding the M2 growth by adding 2-3 percentage points to the sum of the country’s GDP and CPI growth rates. This is a reasonable method. For example， the Chinese Government expects that the GDP will grow by 7.5 percent this year and CPI by 3.5 percent， therefore the central bank should decide that a growth rate of 13 percent for M2 is suitable for the economy. A small money supply will slow down economic growth， but a large one will push CPI growth too high and intensify inflation.
Niu adds that in fact China’s money supply is linked up with the U.S. dollar. Since the United States has been easing its monetary policy， China and other countries have to print more bank notes. Global money growth starts in the United States， and the main reason for global price hikes is the U.S. quantitative easing.
Serving the economy
However argued， China’s monetary policy will only change to suit the demands of its economy， because the monetary policy has four targets： maintaining low inflation， promoting economic growth， increasing employment and maintaining the balance of international payments.
According to Zhou， CPI figures are the top consideration for China’s monetary policy. “The 13-percent growth of M2 in 2013 indicates a sound or a neutral monetary policy. Compared with 2012 or 2011， 13-percent growth has been obviously tightened， and this is to maintain price levels，” he said.
In fact， the central bank has been practicing such a principle. The National Bureau of Statistics released February CPI figures on March 9. CPI grew by 3.2 percent in February compared with the same period last year， which was 1.2 percentage points higher than in January. This indicated signs of inflation. On the same day， the central bank intensified efforts in reducing money supply. By March 21 it had withdrawn 1.01 trillion yuan（$161.08 billion） of cash from the market.
Mei Xingbao， a consultant with China Orient Asset Management Corp.， says this year’s economic growth target requires a prudent monetary policy. After CPI grew higher than expected in February， the government has heightened vigilance against inflation. Since high inflation remains a possibility and economic recovery continues， the liquidity of renminbi will be weaker in the second quarter than in the first.
According to Yang， moderate inflation brought on by labor price hikes may be acceptable in an open economy and will be conducive to facilitating sustainable economic growth. Therefore the central bank， when paying close attention to inflation pressure， should analyze the reason for inflation so as to decide a new standard for“modest inflation” instead of merely taking the 3.5-percent CPI growth as the standard to adjust money supply.
“We have all seen that every year the central bank issues its money supply target for the next year， but in the end the real supply is all quite different from the set targets，” said Yang.
He thinks China should urgently improve the transparency of its monetary policy in order to reduce controversy over whether China is over-issuing money.
“A transparent monetary policy has become a trend practiced by the central banks of various countries， for it can satisfy the public demand for policy disclosure，” Yang said. “In addition， the central bank itself can affect expectations of market participants by improving access to information.”