Recent financial newsflow has seen a number of updates on China’s real estate problem. The gist of most reports are that despite years of attention, the weight of over-investment continues to weigh heavy on both developers and local governments. If China is anything like the rest of the world, the real estate problem would be a harbinger of ‘interesting times’ for the financial sector too. Apparently the attribution of that proverb is apocryphal and popularised by Robert F Kennedy from June 1966 speech in South Africa . “There is a Chinese curse which says ‘May he live in interesting times.’ ” The attribution may be false, but the sentiment is true. The Chinese financial system is having a most ‘interesting time’. A couple of days ago we read: “four of China’s largest state-owned banks said on Sunday they plan to raise a combined 520 billion yuan ($71.60 billion) in private placements from investors, including the finance ministry, after Beijing pledged to help them support the economy. This will not be the end of that story.
The latest ‘Financial Statistics Report from the PBoC for February reports “at end-February, broad money supply (M2) stood at RMB320.52 trillion, rising by 7 percent year on year. Narrow money supply (M1), at RMB109.44 trillion, grew by 0.1 percent year on year.”
The disconnect between narrow and broad money is extreme, even by Chinese standards. I don’t pretend to know the dynamics driving the difference. A shift in asset preferences is the usual explanation for differences in various monetary aggregates. A fall in narrow money and a relative expansion of broad money may indicate a preference for time deposits, or longer investment but as both measures of money are either declining or decelerating, that seems unlikely.