China's money supply grew at a slower-than- average pace in November as the economy continued to weaken, the central bank said Monday.

The M2, the broad measure of money supply covering cash in circulation plus all deposits, rose 14.8 percent to 45.86 trillion yuan (US$6.7 trillion) by the end of November. The growth rate was down 0.22 percentage points from a month ago, according to the People's Bank of China (PBC).

Experts said the M2 growth slowed for the sixth straight month because of decreased incomes and weakened demand.

The M1, the narrow measure of money supply covering cash in circulation plus demand deposits, grew 6.8 percent to 15.78 trillion yuan (US$2.3 trillion), down 2.05 percentage points from the end of October.

"This showed the sharp contraction of business activity as companies began to reduce stockpiles from October," said Liu Yuhui, a researcher at the Institute of Finance and Banking under Chinese Academy of Social Sciences.

Many companies, especially those in the industrial manufacturing and chemical industries, built up huge stockpiles on price bubbles last year and were forced to cut stockpiles after the bubbles busted on falling demand.

The slower M1 growth showed reduced production and investment on pessimistic views about the economic outlook, said Guo Tianyong, an expert of banking at the Central University of Finance and Economics.

China's economy grew 9 percent annually in the third quarter, down from 10.4 percent in the first half. Economic data for October and November indicated a risk of further decline.

Industrial output rose 5.4 percent annually in November, down from 8.2 in October and 17.3 percent a year earlier. In addition, exports slid 2.2. percent, compared to 19.2 percent growth in October and the first monthly decline since June 2001.

The State Council, or Cabinet, on Saturday said it targets a 17 percent growth in M2 in 2009 in a bid to increase money supply to spur economic growth.

China needs more fiscal and taxation policies, including treasury bond sales, to meet the M2 growth target as monetary easing alone has failed to increase supply over the past few months, Guo said.

The PBC has cut the lending rate four times since mid-September, with the latest reduction of 1.08 percentage points, and also lowered the reserve requirement ratio substantially.

More New Loans

The outstanding yuan-denominated loans climbed 16.03 percent to 29.57 trillion yuan (US$4.3 trillion), 1.45 percentage points higher than a month ago.

The newly-added yuan loans in November was 476.9 billion yuan (US$69.6 billion), a rise of 389.5 billion yuan from a year earlier.

The divergence in behaviour between M2 and bank credit suggests a reduced contribution to broad money expansion from foreign exchange reserve accumulation by the central bank, Barclays Capital economists headed by Peng Wensheng said in research note.

The increase was due to a low base in November last year and rises in bank credit in coordination with the massive 4 trillion yuan (US$584 billion) stimulus package to avert an economic slump, Guo said.

New loans was at low levels late last year as lenders were faced with credit quota restrictions designed to prevent an economic overheating and curb inflation.

Provided stable foreign exchange reserves, bank credit would need to grow by 27 percent next year to achieve the M2 growth target, Peng wrote in another note.

Banks have become reluctant to lend amid the worsening growth outlook and an incentive system for loan officers that places more responsibility for non-performing loans, said Peng. He added it is important to increase banks' capacity and incentives to lend.

Guo noted the government should cut taxes for banks while the lenders need to strike a balance between sustaining economic growth and controlling risks.

Liu Mingkang, Chairman of the China Banking Regulatory Commission (CBRC), said on Saturday the agency targets a lower non-performing loan (NPL) ratio next year, but it will "scientifically tolerate" any increases in the stockpiles of bad loans.

The PBC also said the outstanding yuan deposits jumped 19.94 percent to 46.24 trillion yuan (US$6.8 trillion) by the end of November, 1.16 percentage points lower than a month ago.

The new yuan deposits was 403.8 billion yuan (US$59 billion) last month, a decline of 298.6 billion yuan from a year ago.

(Xinhua News Agency December 16, 2008)