China's money supply growth picked up its pace again in October, a surprise rebound that some say may prompt the central bank to take further tightening measures.

 

The broad M2 money supply, which includes cash in circulation and deposits, accelerated in October to 17.1 percent from September's 16.8 percent, according to figures released yesterday by the People's Bank of China.

 

The central bank's target for M2 growth in 2006 is 16 percent.

 

The rebound came as a surprise to many as the money supply growth rate has been on a downward spiral since July, when it grew 18.4 percent year-on-year.

 

"It is a little bit surprising to see the pace (of growth) picking up again," said Han Meng, an economist at the Chinese Academy of Social Sciences.

 

"And it shows that the central bank is fighting an uphill battle to rein in money, credit and investment growth as the country's foreign trade surplus is still mounting," the economist said.

 

The central bank has already taken a host of measures to curb money and credit growth since April, when there were signs that the economy was overheating.

 

Since then, it has twice increased the interest rate and ordered commercial banks to raise deposit reserve ratio.

 

On November 3, the central bank once again raised its deposit reserve ratio the proportion of deposits that banks must hold in the central bank.

 

The latest measure, which comes into force today, will see the deposit reserve ratio increased to 9 percent for major State-owned banks and joint-stock banks, while it will rise to 9.5 percent for smaller banks, including urban credit cooperatives.

 

"The latest figures may prompt the central bank to further tighten its monetary policy before the end of the year, with a further increase in the bank deposit reserve ratio being the most likely choice," Han said.

 

Despite the rebound in money supply growth, local currency lending maintained its stable growth and deposits fell slightly, the central bank said.

 

Outstanding local currency lending stood at 22.1 trillion yuan (US$2.75 trillion) at the end of October, a year-on-year increase of 15.2 percent, which is almost the same as the previous month, the central bank said.

 

Banks issued 17 billion yuan (US$2.81 trillion) in new local currency loans last month, a drop of 9.4 billion yuan (US$1.19 billion) from a year earlier.

 

Financial institutions made a total of 2.78 trillion yuan (US$347 billion) in new loans in the first 10 months of the year, which surpassed the central bank's full-year target of 2.5 trillion yuan (US$312 billion).

 

Outstanding local currency deposits reached 32.93 trillion yuan (US$4.11 trillion) by the end of October, up 17 percent year-on-year, the central bank said.

 

M1, which covers cash in circulation and current account deposits, jumped 16.3 percent in October from a year earlier, which the central bank said "is mainly due to the rapid increase in deposits made by enterprises in the month."

 

Many economists have said that the massive foreign exchange reserve is to blame for the growth in money supply and credit.

 

"As long as the huge foreign exchange reserve continues to grow, it will complicate the central bank's efforts to curb money supply," Li Yongsen, an economist at Renmin University of China, said in an earlier interview with China Daily.

 

"The central bank has to release new money to mop up the excess US dollars in the marketplace and enforce a floating band for the renminbi, which is driving up money supply growth," Li said.

 

Fuelled by the growing foreign trade surplus and the inflow of foreign direct investment, China's foreign exchange reserve, already the world's largest, is believed to have exceeded the US$ 1 trillion mark.

 

China's monthly foreign trade surplus surged to a record US$ 23.8 billion in October, while foreign direct investment stood at US$42.59 billion in the first nine months of this year, although this was a year-on-year dip of 1.52 percent.

 

(China Daily November 14, 2006)