Central Bank Official to Media: How to understand the changes in M1 growth rate?

In April, the narrow money (M1) balance was 66.01 trillion yuan, a year-on-year decrease of 1.4%, attracting market attention. How should we understand the growth rate of M1? Where will the future rebound of M1 come from? In response to this, the "Financial Times" interviewed several industry experts.

Industry insiders believe that in the first half of the year, due to factors such as "squeezing out excess liquidity" in the financial industry and slow fiscal efforts, the downward trend in M1 growth is not solely influenced by weak corporate expectations. Looking deeper, the M1 statistical caliber does not include residents' demand deposits, making M1 particularly sensitive to changes in corporate demand deposits. Looking ahead, with the strengthening of fiscal expenditures and the effects of real estate policies becoming apparent, M1 growth is expected to break free from negative growth and rebound.

M1 Statistics Influenced by Financial Innovation and Regulatory Changes

Internationally, although countries have slightly different definitions of M1 and M2, and the classification of monetary levels may be adjusted at different times, they are all based on the liquidity of money. Different levels of money have different liquidity. The IMF's definition of M1 includes cash (M0) and deposits that can be immediately and directly converted into purchasing power, mainly demand deposits, including both residents' and corporate demand deposits.

"The essence of M1 is financial instruments that can be directly used for payment, and its statistical caliber is influenced by financial innovation and regulatory changes." A report by CICC pointed out that, combining the definitions of the IMF and the United Nations, M1 is not necessarily deposits, it can be various financial instruments that meet certain conditions; the financial instruments that make up M1 must be directly usable for payment, with "direct" implying no loss of face value, no delays, no penalty interest, and other restrictions during the payment process.

It is worth noting that although there are some differences in M1 statistics among major economies globally, they generally adhere to the essential characteristics of M1. Financial instrument innovations may enable some new assets to possess the characteristics of M1, and changes in regulatory requirements may also allow some financial instruments to acquire the characteristics of M1.

Currently, the People's Bank of China's M1 statistical caliber includes the total of circulating cash (M0), corporate demand deposits, deposits of government institutions and groups, rural deposits, and individual credit card deposits. Compared to overseas, China's M1 statistical caliber is relatively narrow, with the main difference being that personal demand savings are not included in M1 statistics. "From the essence of M1, China may have some financial instruments that possess M1 attributes but have not yet been included in M1 statistics." According to a report by CICC, these financial instruments mainly include three categories: residents' demand deposits, some non-deposit financial products, and reserve funds of third-party payment institutions.

Liu Lu, Chief Analyst of Fixed Income at Ping An Securities, also mentioned that compared to internationally accepted standards, China's M1 statistics do not include residents' demand deposits. In addition, with the application of electronic technology in the financial field, customer reserve funds in third-party payment institutions, money market funds represented by Yu'ebao, and cash management products have basically acquired the function of being directly used for consumer payments, making it reasonable to include them in M1 statistics

What changes will be made by including residents' demand deposits in M1?

In the first half of the year, the growth rate of M1 overall showed a downward trend, with a year-on-year decrease of 1.4% in April, resulting in negative growth. Zhang Jingjing, Chief Macro Analyst at CMB International, believes that the lack of residents' demand deposits is one of the major factors causing significant fluctuations in M1. In comparison to domestic practices, developed countries have a broader scope in the statistics of M1, including residents' demand deposits in addition to institutional demand deposits. If China includes residents' demand deposits in the scope of M1 statistics, it can significantly reduce the volatility of M1 growth.

"If residents' demand deposits are included in the scope of M1 statistics, the trend of M1 growth has been declining since the beginning of last year, which is more consistent with the original calibre. However, the growth rate of M1 under the new calibre is smoother, to some extent smoothing out policy disturbances." Liu Lu stated that in April, due to the restraint of high-interest deposit-taking behavior through "manual interest supplementation" under the market interest rate self-regulation pricing mechanism, on one hand, arbitrage behavior by enterprises through bill financing and investing in high-interest deposits was corrected, leading to a rapid decline in M1 as some deposits and loans contracted simultaneously; on the other hand, bank deposits faced pressure to transfer to cash management products such as wealth management and money market funds for a period of time, causing a rapid decline in M1 from a technical perspective. The new calibre can smooth out the impact of bank deposit transfers to cash management products on M1.

Industry analysts analyzed that as of the end of April 2024, the scale of M1 announced by the People's Bank of China was 66.01 trillion yuan, a year-on-year decrease of 1.4%. If personal demand deposits are added to the M1 statistics, the scale at the end of April would be 104.8 trillion yuan, a year-on-year increase of 0.6% (base adjustment synchronized, the same below). If payment company customer reserves, money market funds, and cash management products are also included in M1, the scale at the end of April would be 129.1 trillion yuan, a year-on-year increase of 2.6%. Overall, although the growth rate of M1 including the above three types of funds is also declining, the overall volatility is significantly reduced.

Where does the momentum for the rebound in M1 growth come from?

Looking ahead, where might the momentum for the rebound in M1 growth come from? Liu Lu analyzed that historically, there is a clear positive correlation between the growth rate of property sales and M1 growth. The basic logic is that during the process of residents purchasing properties, residents' savings deposits are directly converted into institutional demand deposits, thereby driving M1 growth. In addition, the stabilization of the real estate industry chain can also drive the improvement of the business climate in upstream and downstream industries, further boosting M1 growth.

Liu Lu also mentioned that government bond issuance and expenditure will generate income and deposits for the real sector, driving the rebound in M1 growth. The progress of government bond issuance has been slow this year, insufficiently leveraging M1. After May, the speed of government bond issuance has accelerated, and with further fiscal efforts in the future, it is expected to provide a certain boost to M1 growth.

"The ideal way to achieve a rebalancing of money supply and demand is not to reduce the money supply, but to improve the way money is supplied, shifting from credit-based money injection to fiscal-based money injection." A report from CICC stated that fiscal-based money injection directly enters the real economy, increasing real demand, aiding in the rebalancing of supply and demand, and also increasing the demand for transactional money, which is beneficial for rebalancing money supply and demand Considering that the 1 trillion yuan of medium and long-term national bonds issued at the end of last year are mainly used this year, as well as the additional quota of 1 trillion yuan for ultra-long-term special national bonds this year, overall, this year's broad fiscal stimulus may be moderately higher than last year.

In addition, Liu Lu stated that according to historical patterns, during the phase of export improvement, corporate foreign exchange earnings improve synchronously, leading to an increase in RMB deposits after conversion. Since October last year, export growth has rebounded, and the difference between bank foreign exchange purchases and sales for clients is still on a downward trend, showing a certain differentiation. This generally indicates that some funds are delaying foreign exchange settlement, which may also drag down M1 performance. In the future, if there is convergence in monetary policies between China and the United States, and as the fundamentals of our country gradually improve, corporate foreign exchange transactions will return to normal, which can also drive M1 growth.

Source: Financial Times, Original Title: "How to Understand Changes in M1 Growth Rate?"