China - Monetary Policy 2016
Part 1 Money and Credit Analysis
In 2016, liquidity in the banking sector was generally sufficient, with money, credit, and all-system financing aggregates growing steadily and relatively rapidly, and with lending structures improving continuously. Interest rates were at a low level and the RMB exchange rate became more flexible. The monetary and financial environments were basically stable.
Monetary aggregates grew steadily
At the end of 2016, outstanding M2 stood at RMB 155.0 trillion, up 11.3 percent year on year and representing a deceleration of 2 percentage points from end-2015; outstanding M1 stood at RMB 48.7 trillion, up 21.4 percent year on year and representing an acceleration of 6.2 percentage points from end-2015; outstanding M0 stood at RMB 6.8 trillion, up 8.1 percent year on year and representing an acceleration of 3.2 percentage points from end-2015. On a net basis, the PBC pumped RMB 508.7 billion into the economy, an acceleration of RMB 213.0 billion year on year.
At the end of 2016, growth of M2 was significantly higher than that of nominal GDP. Relative to actual demand in the economy, growth of the money supply remained at a higher level. From the supply side, in addition to a large amount of RMB lending, money derived from bond investments and equity and other investments also registered relatively rapid growth, increasing RMB 5.67 trillion and RMB 7.15 trillion respectively from the beginning of the year, representing an acceleration of RMB 358.0 billion and RMB 583.7 billion year on year respectively. By the end of 2016, growth of M1 had declined for 5 consecutive months from its former high levels, decreasing by 4 percentage points from the year’s highest level in July, and the M1-M2 margin further narrowed to 10.1 percentage points.
At end-2016, outstanding base money registered RMB 30.9 trillion, up by 10.2 percent year on year and representing an acceleration of 16.2 percentage points from end-2015. This was RMB 2.9 trillion more than that at the beginning of the year, an increase of RMB 4.8 trillion from the same period of the last year. The change in base money in 2016 was related to the change in the way the central bank provided liquidity. In 2015, the central bank mainly relied on lowering the deposit reserve requirement ratio (RRR) to provide liquidity. The RRR cut would turn a certain portion of required reserve into excess reserve, changing the structure, but not the quantity of base money. In contrast, in 2016 the central bank depended more on tools such as repos on the open market, the medium-term lending facility, and pledged supplementary lending to provide liquidity, which directly increased base money and accelerated its growth. Since base money is related to central-bank operations, although the growth of base money in recent years has changed dramatically, liquidity in the banking system (excess reserves) has remained at a reasonably appropriate level. At the end of 2016, the money multiplier stood at 5.02, a slight decrease of 0.02 from end-2015. The excess reserve requirement ratio of financial institutions was 2.4 percent and the excess reserve requirement of rural credit cooperatives was 11.1 percent.
Growth of Money Supply
At the end of 2016, outstanding deposits of domestic and foreign currencies in all financial institutions posted RMB 155.5 trillion, up 11.3 percent year on year and representing a deceleration of 1.1 percentage points from the same period of the last year. This was an increase of RMB 15.7 trillion from the beginning of the year and RMB 434.8 billion more than the increase during the same period of the last year. Outstanding RMB deposits registered RMB 150.6 trillion, up 11.0 percent year on year and representing a deceleration of 1.4 percentage points from the end of 2015. This was an increase of RMB 14.9 trillion from the beginning of the year and a deceleration of RMB 92.4 billion year on year. Outstanding deposits in foreign currencies registered USD 711.9 billion. This was an increase of USD 84.5 billion from the beginning of the year and a year-on-year acceleration of USD 67.8 billion.
In terms of the maturities of RMB deposits, the trend toward demand deposits continued. In 2016, demand deposits accounted for 56.4 percent of the new deposits from the household sector and the non-financial corporate sector, up 2.8 percentage points from the