Based On This Measure, China May Be Caught in a Liquidity Trap

trend

Based On This Measure, China May Be Caught in a Liquidity Trap
Look at broad money growth, not narrow.
Siddharth Verma @_sidverma
July 25, 2016 — 1:38 PM EDT

Markets might get concerned about China again.
Supportive credit conditions and growth that's beat economists' expectations have buoyed investors and turned January's concerns into a distant memory, in part thanks to a commitment to unleash credit even at the cost of adding to the country's debt load.
But based on a broader measure of money supply, the People's Bank of China is failing to keep liquidity conditions loose, according to Lombard Street Research Ltd.

Welcome to the liquidity trap. While markets are all-too aware of Beijing's challenge to pump up the money supply to spur private investment, the scale of the mission is put into stark distinction by Michelle Lam, analyst at Lombard.
In a research note published on Monday, she writes: "Over the past two quarters, the PBOC has injected liquidity in excess of capital outflows. But our measure of broad money, which is the best indicator of overall monetary conditions, has deteriorated on a year-on-year basis, and fell below its level in 2013-14 and the government’s target."
Lombard's 'M3' calculation uses the official, so-called 'M2' measure, which is a broader measure of money than what's known as M1, since it includes time deposits as well as cash and current deposits. In order to calculate M3, Lam adds in deposits that are excluded from mere M2, in addition to banks' stock of bonds, and foreign liabilities.
The monetary picture is complicated further by the fact narrow money growth, or M1, has continued to soar in recent months, diverging with broad money growth.
Lam reckons the private sector is becoming increasingly unresponsive to M1 growth, with it either hoarding liquidity in deposits or deploying it to repair balance sheets.
"The divergence between narrow and broad money growth just highlights how difficult it has become for Beijing to generate growth by throwing money at firms that are unwilling to invest. Stimulus has boosted growth but has few second-round effects, and money is just not being passed around," she says.

The PBOC doesn't publish M3 data, but instead refers to Total Social Financing, a liquidity measurement tool introduced in 2011 to better capture shadow-banking activities. TSF surged to 1.63 trillion yuan ($244 billion) in June, from 659.9 billion in May, further complicating the monetary picture.
Start your day with what’s moving markets.
Get our markets daily newsletter.

Despite its wider usage, many analysts say TSF is a flawed measure for monetary conditions in China. It typically excludes municipal bonds, and suffers from double-counting by measuring both the creation of money and its use. For example, if an individual borrows $100 from a bank and invests that in corporate bonds, this would show up as a $200 increase in TSF flow, when, in this instance, there's just a $100 creation of credit to the real economy, Lam explains.  
Striking a more upbeat note on credit conditions, HSBC Holdings Plc. on Monday said its China Monetary Conditions Indicator improved to its highest reading in over five years in June, driven by a weaker real effective exchange rate.  
Yet, in the case of China, yuan depreciation when combined with the capital outflows assumed by a Goldman Sachs Group Inc. analysis to be $49 billion in June, imply the opposite conclusions, Lam said in an e-mail.
In other words, Lombard's broad money growth – which may be a better measure of monetary conditions than M2 and TSF – has deteriorated. This all contributes to expectations the PBOC will loosen monetary conditions further this year.

Hutong9999

I guess no model works well for China

风行过

国内做生意的都说难做。