The financial data for the whole year of 2023 has been released. On January 12, 2024, the report highlighted some impressive figures. As of the end of December, the broad money supply M2 balance was 29.227 trillion yuan, a year-on-year increase of 9.7%. The narrow money supply M1 balance was 6.805 trillion yuan, a year-on-year increase of 1.3%. Additionally, the net cash injection for the whole year of 2023 was 881.5 billion yuan. Today, let’s delve into a discussion about these three data points. Previously, I briefly explained the relationship between M0, M1, and M2. These three are components of the money supply statistics. In this session, we will further explore how the issuance of money contributes to the formation of the money supply. In October 1994, the Interim Measures for the Compilation and Publication of Money Supply Statistics were introduced, officially releasing the money supply statistics to the public. China’s money supply is divided into three levels: M0 represents the cash in circulation, M1 includes M0 plus corporate demand deposits, and M2 comprises M1 plus savings deposits and corporate time deposits. This was the initial scope of the money supply statistics table.
In the years 2001, 2002, 2011, and 2018, there were modifications made. The first modification was in 2001 when M2 added margin deposits, which are included in other deposit items. In May 2001, M2 jumped from 596.9 billion yuan to 1.38 trillion yuan, a significant increase of 441.1 billion yuan. One of the reasons for this adjustment was the booming stock market. Therefore, the margin deposits from stock investors had a significant impact on N2 at that time. Additionally, the frenzy of new stock offerings during this period also caused significant fluctuations in the M2 statistical indicators.
Participating in new stock offerings, known as “打新” in Chinese, means applying for shares of newly issued stocks. If you are lucky enough to be allocated shares, it is like getting stocks that are about to be listed. Generally, the opening price of new stocks is higher than the issue price, which is why “打新” is also called “薅股市羊毛” in Chinese, meaning “shearing the stock market sheep’s wool.” It’s surprising that this practice existed so early, but the era of blindly participating in new stock offerings has now passed.
The second adjustment took place in early 2002, when China had already joined the WTO and foreign investment was increasing. At that time, the RMB deposits of foreign-funded and joint venture financial institutions in China were included in the statistical scope of money supply. In March 2002, the total assets of foreign commercial banks in China reached 279.69 billion yuan, accounting for approximately 2% of the total assets of commercial banks that year. Although the scale was relatively small at the beginning, the continuous growth of foreign-funded and joint venture financial institutions led to an increasing proportion of these funds in M2.
The third adjustment took place in 2011, when the money supply increased. Deposits in the housing provident fund center and non-deposit financial institutions, as well as deposits in deposit-taking financial institutions, were included in the M2 statistics in October 2011. The deposits in the housing provident fund center accounted for 0.82% of M2, while the size of deposits in non-bank financial institutions included in M2 was approximately 3.61 trillion, accounting for 4.42% of M2 at that time. The sum of these two accounted for 5%, but this percentage actually became much larger, especially as the size of deposits in non-bank financial institutions expanded rapidly after this time point.
Non-bank institutions refer to all financial institutions outside of commercial banks and specialized banks, such as fund companies, trust companies, securities firms, insurance companies, financial companies, and microcredit companies. For example, the shadow banking system was previously discussed in a session. According to the book “The Next Subprime Crisis: The Source of the Next Subprime Crisis” by Zhang Huaqiao, the shadow banking system in China started late but developed rapidly. From 2008 to 2012, the total size of the shadow banking system reached 20 trillion. Then, from 2012 to 2016, during the period of financial liberalization, as some students may recall, peer-to-peer lending (P2P) was very popular, but it also led to losses for many people.
By 2017, the scale of shadow banking had increased from 20 trillion to 100.4 trillion yuan. It is important to note that this figure refers to the scale, not deposits. However, one thing is certain – non-bank institutional deposits were included in the statistics, which had a significant impact on M2. The fourth adjustment to monetary statistics took place in 2018, where money market funds held by non-deposit institutions replaced money market fund deposits. The previous three adjustments had improved the categorization of household deposits, corporate deposits, and non-bank deposits. The fourth adjustment included not only deposits but any money market fund, as long as it was included in the statistics.
The Market Research Department of the China Construction Bank’s Financial Markets Department believes that the significance of this adjustment lies in the fact that China’s monetary creation channels mainly consist of three levels: traditional on-balance-sheet loans by commercial banks, foreign exchange bond monetary creation, and shadow banking monetary creation. How can we understand these three levels? The first two are more regulated, legitimate sources of monetary creation that can be openly discussed. The third level, shadow banking monetary creation, is less regulated and involves more hidden aspects. Therefore, the purpose of the previous adjustment was to enhance supervision.
As of the end of January 2018, the scale of money market funds was 7.38 trillion yuan, accounting for 4.29% of M2. After the adjustment, M2 increased by 1.15 trillion yuan.
After four rounds of checking and supplementing, the statistical scope is as follows: N0 represents cash in circulation, M1 equals M0 plus corporate demand deposits, and N2 equals N1 plus quasi-money. Quasi-money includes unit time deposits, household savings deposits, and other deposits, which consist of securities companies, customer margin deposits, non-bank deposits, housing provident fund deposits, and monetary funds held by non-deposit institutions. It can be seen that the main adjustment is the statistical scope of broad money M2. After clarifying the origins and details of these three categories, the balance of broad money M2 reached 292.27 trillion yuan, while the balance of narrow money M1 was 68.05 trillion yuan. A total of 881.5 billion yuan in cash was injected throughout the year.
Here are two points to explain to everyone. Firstly, the derivative effect of currency. M0 is cash circulating outside the banking system and serves as the basis for other monetary supply indicators. For example, if $100 enters a bank and the reserve requirement ratio is 10%, Bank A needs to keep $10 as reserves and can lend out the remaining $90 to a business. The business then deposits the $90 into Bank B, which also needs to keep 10% as reserves, leaving $81 to be lent out to another business. This process continues, increasing the amount of deposits and eventually reaching a scale of $500 or $1000, thereby increasing the money supply. This affects the derivative currency in the banking system, known as M1. In 2023, the narrow money M1 balance was 68.05 trillion yuan, referring to this process.
The reason why the second currency did not flow into our hands is because if M1 is derived currency, then M2 is distribution currency. Following this line of thought, we can understand the process of currency creation and circulation. Derived currency M1 is distributed to businesses and individuals, and M2 ultimately flows into the market. Additionally, starting from December 2022, M0 includes digital RMB in circulation. The broad money supply M2 of 29.227 trillion yuan is the water of this distributed currency. Compared to 2022, in 2023, the broad money supply M2 increased by 2.584 trillion yuan. With this growth rate, surpassing 30 trillion yuan this year is a sure thing.
So why, despite releasing so much currency water, did the market not meet expectations? This can be seen from the growth rates. In 2023, M2 increased by 9.7% year-on-year, while M1 only increased by 1.3% year-on-year. The growth rates of M2 and M1 can reflect the current economic situation. When the growth rate of M2 exceeds that of M1, it indicates that the corporate sector is more willing to hold onto cash rather than invest in increasing production.
The growth rates of 9.7% and 1.3% differ by 7.5 times. The business sector’s economic expectations are not as optimistic as imagined. Of course, from a macro policy perspective, it is necessary to boost the economy, stimulate business vitality, increase the money supply, which is a monetary policy that the central government must adopt, which is understandable. However, it seems that the results are not meeting expectations. Is it possible that the money is not flowing to the businesses that truly need funding, especially private enterprises and small and medium-sized enterprises? There may be two reasons for this. One is that these enterprises lack qualifications and cannot access funding, which is a historical issue of difficulty in financing for small and medium-sized enterprises. The other reason is that businesses do not want to finance, hire people, increase production, or expand their operations.
Lastly, let’s talk about the fact that the broad money supply is close to 3 trillion. Where has all this money gone? In reality, it is stuck within the banking system and has not been circulated. Therefore, banks are also helpless. Currently, the market is generally unwilling to borrow money, and banks can only shrug their shoulders and say they cannot force people to borrow. When can this situation be reversed? From a macro perspective, monetary policy has made unprecedented efforts within the permitted range. However, from a micro perspective, many people are actively deleveraging and reducing debt, and this process cannot be stopped. Therefore, what is needed at this time is an income effect. When everyone’s income increases, there will be positive expectations, making it easier to address issues like consumption and others.
