China's monetary policy will not relax as M2 growth slows

China's financial market should become more accustomed to a slowing M2 growth and pay more attention to how the central bank uses interest rates on open market operations, the Bank of Communications said in its review of the central bank’s latest quarterly monetary report.

The outstanding M2, the broad measure of money supply, totaled 167.7 trillion yuan (US$26.4 trillion) as of the end of 2017, up 8.2 percent year on year. The growth rate slowed by 3.1 percentage points compared with 12 months ago, according to the latest report released by the People’s Bank of China.

The drop was attributed to banks’ declining equity and other investments, slowing bond investments and a bigger-than-expected growth of fiscal deposits, said the central bank.

The report argues that as China is transforming its economic structure, there are changes in the correlation between M2 and economic growth. 

E Yongjian, chief financial analyst, and Qiu Gaoqing, chief researcher at BoCom, believe the PBOC will not change its stance of maintaining prudent monetary policy this year due to a slowing M2 growth.

Therefore, the market should become more accustomed to this. They noted that M2 remains an important variable to observe the relationship between finance and the real economy, and the market needs to pay more attention to the changes in interest rates on open market operations.

The report emphasized the PBOC will make better manage liquidity and BoCom said that “neutral and moderate” liquidity will be the central bank's main target.