China's monetary growth slowed its pace notably last month, increasing confidence that macroeconomic measures put in place this year can be effective in preventing the economy from overheating.

Broad money supply M2, which covers cash in circulation and all deposits, rose by 17.5 percent on a year-on-year basis in the first five months of the year to 23.48 trillion yuan (US$2.8 trillion) at the end of May, down 1.6 percentage points from one month earlier, the People's Bank of China (PBOC) said Thursday.

Growth for loans also showed an obvious slowdown. Outstanding renminbi loans grew by 18.6 percent from a year earlier to 17.06 trillion yuan (US$2.05 trillion) at the end of May, down 1.3 percentage points from April, while last month's new loans dropped by more than 50 percent from a year earlier to 113.2 billion yuan (US$13.6 billion).

"That means macroeconomic measures, or at least the efforts to contain loan increases, have had some noticeable effect," said Wang Yuanhong, a senior analyst with the State Information Center.

The slowdown in monetary growth exceeded the central bank's expectations. In its first-quarter monetary policy report released last month, the PBOC said monetary and credit growth will continue their fast pace through June, and will only start to subside in the third quarter when the effects of its earlier tightening moves become evident.

Industrial output also slowed down last month, growing by 17.5 percent from the same period last year, which is down 1.6 percentage points from April, the National Bureau of Statistics said yesterday.

However, Wang said a more important number to watch is the growth in fixed investment, which is the prime reason for concern that the economy is overheated in some sectors.

"But given the monetary and credit numbers, the pace (of investment growth) should also be coming down," he said.

The fixed investment numbers for May are expected later this month.

China's fixed investment soared by 42.8 percent in the first four months of this year, following even faster growth last year, as the demand for a string of industrial materials like steel, cement and aluminium, and goods like new houses and cars remained strong.

A growing list of industries have been diagnosed with signs of excessive investment, with steel, cement and aluminium being the most obvious.

The investment frenzy pushed up growth in bank lending. A huge part of investment in the "overheated" sectors - as high as 60 percent - is estimated to have come from bank loans.

The PBOC has tried to bring down investment and lending numbers. It announced two increases in bank reserve requirements - which took effect in April - and raised rates on central bank lending, with both moves aimed at reducing the banks' lending capacities.

The China Banking Regulatory Commission has also announced broad inspections into bank loans for fixed investment projects.

Many have thrown doubt on the effectiveness of those moves as loans continued on the fast track in the early months of this year, and most see an interest rate rise as the central bank's last resort. But the loan figures for May are expected to somewhat revise people's adjustments over the lending situation.

The slowdown in monetary growth was not only a result of slower loan increases, but partly due to a downtrend in the growth of savings, Wang noted.

Savings growth dipped by 4 percentage points last month from a year earlier to 17.9 percent in May, the PBOC said without elaborating further. The bank attributed April's slowdown in savings growth to increased issuance of Treasury bonds and new mutual funds.

But uncertainty still remains about the nation's monetary growth for the remainder of the year, analysts said.

Despite high rates of around 20 percent in the first few months of this year, the PBOC said in its first-quarter monetary policy report that a 17 percent M2 growth target for the entire year was still achievable.

That would require annualized M2 growth to be below 17 percent for the remainder of the year. But if the monthly adjusted growth continues at the pace recorded in May, the full-year growth would be only 10 percent, which analysts said will be too abrupt a slowdown.

The PBOC did not give the monthly-adjusted growth rate of M2 for May, but only said it will be equivalent to a 10 percent full-year rate after deducting seasonal factors.

(China Daily June 11, 2004)