An overview of Lujiazui, Shanghai, a financial hub in China. Photo: IC

Money supply (M2) growth

 

China's broad money supply (M2) will grow by around 13 percent this year, meeting the target set by the country's top economic planner in March, the People's Bank of China (PBC) said on Wednesday.

The PBC, China's central bank, said in its 2013 annual report that it will stick with a prudent monetary policy this year, while maintaining an appropriate amount of liquidity and guiding a stable increase in social financing and loans.

Zhou Xiaochuan, governor of the PBC, said in a statement included in the 145-page report that the central bank will "push forward the financial reform vigorously, maintain a stable financial market, increase the standards of financial services and management, and support the restructuring of the economy."

The report was released after China on Tuesday posted a 2.5 percent year-on-year inflation rate in May, well below the 3.5 percent official target, which gives the government leeway to further fine-tune the economy.

China's M2 increased by 13.6 percent to 110.65 trillion yuan ($17.11 trillion)  year-on-year in 2013. On March 5, the country's top economic planning agency, the National Development Reform Council (NDRC), set a 2014 M2 growth target of 13 percent, the lowest increase in more than a decade.

Lu Zhengwei, chief economist with the Industrial Bank Co, told the Global Times on Wednesday that China will likely meet the target, though the country's economy is facing serious downward pressure.

"The slowing economy gives the central bank a good reason for monetary policy easing," Lu said. "China will achieve an annual M2 growth somewhere between 13 percent to 14 percent this year."

Zhu Lixu, a Shanghai-based analyst with Xiangcai Securities, told the Global Times on Wednesday that a 13 percent increase will translate to a GDP growth of around 7.5 percent, meeting the target set by the central government at the beginning of 2014.

However, achieving the NDRC target might have a negative impact on the economy, Zhu said.

"It is not necessary for the government to maintain high-speed growth now," he remarked. "China needs to de-leverage, instead of adding more leverage which will delay the reform of the country's economic structure and increase the risks the government will have to manage in the future."

The report reiterated major financial reform policies, such as quickening the liberalization of the interest rate and setting up a deposit insurance system, that have repeatedly been stressed by the government since a November meeting of the country's top leaders.

The PBC made several moves in the first six months of this year to deepen the financial reform.

On Monday, it announced that it will cut the reserve requirement ratio for banks with a certain proportion of lending to the agricultural sector and small firms in order to boost liquidity.

On March 15, it widened the trading band of yuan to 2 percent above and below the PBC's fixed daily central parity rate, a vital move to reform the currency's exchange rate regime.

The central bank will likely focus on establishing a deposit insurance system in the second half of 2014, Zhu said. However, no drastic measures will be taken to liberalize the interest rate, he noted, given that the reform might hinder a stable economic growth of the country, which Chinese Premier Li Keqiang vowed to maintain.

However, Lu anticipated that the PBC might finally launch five banks owned entirely by private companies such as Alibaba Group and Tencent Holdings in the next six months.

That would be a significant move to free the interest rate, he said.
Newspaper headline: Central bank to continue prudent monetary policy