China's M2 and Bank Loans

There is a shortage of pigs in China. Meat prices rose 32.3% y/y in China’s June CPI, led by soaring pork prices. This was the major contributor to driving food prices up 14.4%, the highest since June 2008, when rapidly rising pork prices were also a big problem. The overall CPI rose 6.4% y/y, up from 5.5% during May. Excluding food, it was up 3.0%.

The People’s Bank of China (PBOC) has responded to mounting inflationary pressures by raising the official rate three times this year. However, there isn’t much that monetary policy can do to increase the supply of pigs, though it can certainly depress the demand for pork by causing a recession. So far, tighter monetary policy hasn’t done much to depress the growth rates of either bank loans or M2 in China. Nor has it slowed the economy, as widely feared.

China’s M2 jumped 1741 billion yuan in June. On a y/y basis, it is up 15.9% in yuan and 21.9% in dollars. China’s M2 is now 33% greater than America’s M2. In 2000, it was only 30% as large as America’s M2! Financial institutions issued 633.9 billion yuan of new loans in June, up from 551.5 billion yuan in such lending during May. On a y/y basis, loans are up 15.2% in yuan and 21.3% in dollars. A flood of bank lending in recent years has been one factor driving up consumer prices.

China’s second-quarter GDP rose 9.5% y/y, compared with 9.7% growth during Q1. The rate of growth increased on a sequential basis to 9.1% (saar) during Q2 compared with 8.7% during Q1. Industrial production growth in June also came in much faster than expected, rising 15.1% y/y, compared with 13.3% in May.