Unknown to everyone except the People’s Bank of China, at the time of announcement of the monetary statistics, the PBOC had quietly expanded the definition of M2 money supply, and announced it only last night in a statement.
The statement essentially said that the new M2 definition has been used in the October monetary statistics, which showed that M2 increased by 12.9% yoy. The new definition includes both non-depository financial institutions deposits and social housing fund on top of existing M2 measure. All adjustments towards the previous M2 figures are not published at this stage except for October 2010, which the statement said was RMB72.35 trillion, and which is how they arrived at the 12.9% growth for October 2011. The M2 for October 2010 under previous criteria was about RMB69.98 trillion, thus based on the revised October 2010 figure, the old M2 measures are roughly 3.4% understated.
The understatement of money supply started in the last two years as the shadow banking system grew rapidly, and there is a chance that the money supply growth since the financial crisis and the subsequent aggressive monetary easing is understated somewhat. As a result, M2 was no longer reliable, and the People’s Bank of China previously mentioned that they are developing a new measure of broadest money supply (they call that M2+).
As for the implications, Dong Tao of Credit Suisse thinks that this makes monetary easing less justifiable:
The bottom-line of PBoC’s revision on its M2 definition is that it would be even less justifiable to conduct monetary easing at this point. When this exercise is completed, the new M2 growth could be a few percentage points higher, given that the fast growing off-balance sheet financial activities are taken into account. This would be supportive of our view that while liquidity conditions in the banking system are tight, liquidity conditions in the entire society are not very tight. The PBoC did not explain why it only added two new deposit categories into M2 at this stage (still excluding off-balance sheet financial products), though we think the action is consistent with the central banks’ effort to progressively take banks’ off-balance sheet financial activities under its scrutiny.
Here are the new charts:
