Sunday, April 17, 2011

China's M2 & Bank Loans

Central banks have been providing lots of intoxicating liquidity to keep the party going. Leading the merry band of bankers has been the People’s Bank of China (PBoC). It is still doing so. China’s M2 increased $363.8 billion during March, the biggest monthly increase on record.

China’s M2 is up 21.3% y/y and 48.7% over the past two years. It now exceeds America’s M2 by 29.5%. Ten years ago, America’s M2 exceeded China's M2 by 202%. Over the past two years, the PBoC has been raising the amount of reserves that banks are required to hold. It did so again on Saturday by raising the reserve ratio for large banks by 50bps to a record 20.5%, less than two weeks after hiking interest rates. However, the PBoC has simultaneously injected more reserves into the banking system by accumulating foreign exchange reserves totaling a record $3.0 trillion during February, up $565.9 billion over the past year. As a result, commercial bank loans continue to rise rapidly. During March, they rose $108.5 billion m/m and $1,297 billion y/y.

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