Observations: 15 September

Several years ago, Chinese premier Li Keqiang is said to have told America’s ambassador that China’s GDP statistics were “man-made” — not to be relied upon. Li used three variables to gauge China’s economic performance: electricity consumption, rail cargo volume and bank lending. Yesterday, August data became available for the first of these variables showing a significantly declining trend in growth. A similar message showed up in the retail sales data.

Source: Xinhua

Despite rising cases of the delta variant, PBOC officials have yet to indicate a change in policy stance. Sun Guafeng, head of the PBOC’s monetary policy department, highlighted at a State Council meeting on 8 September that “current conditions may not require as much liquidity as before to keep money market interest rates operating stably”. He added that there was no large base money “gap” in China and the supply and demand for liquidity will remain balanced in the next months.

The chart below shows short-term interest rates in China relative to their corridor instruments. Around quarter-end and month-end, there are signs that money markets are increasingly “tight”.

Source: Chinamoney.com.cn; Reuters.

As recently as late August, PBOC Governor Yi Gang highlighted that amidst an “uneven recovery”, banks would be encouraged to maintain credit growth to small businesses in the coming quarters to support growth. That outcome appears less likely given the liquidity strains at China Evergrande. However, Yi also noted that the PBOC “will basically match the expansion of money supply and social financing to nominal economic growth”. With money supply (M1) slowing to c. 4% in August and M2 running in-line with nominal GDP , there is scope to shift toward a modest easing bias into the end of the year.