Reduce money supply

The recent controversy over whether China has issued excessive money reflects public worries about rising prices. Policymakers need to take heed of such concerns and find solutions to inflation.

Official statistics show that China's M2, a broad measure of money supply that includes all types of deposits and cash in circulation, exceeded 97.4 trillion yuan ($15.5 trillion) by the end of 2012, which is the world's largest money pool, 1.5 times that of the United States.

Meanwhile, China's ratio of M2 to its GDP is 188 percent, compared with less than 90 percent in the US, the world's largest economy. China has therefore been criticized for having issued excessive money.

However, it may be premature to reach the conclusion through such a simple comparison. As the world's second-largest economy, China has seen its economy growing at a fast pace. The sheer scale and the fast expansion of its economy, as well as its ever more sophisticated financial activities, mean its economy may have demand for more money supply.

The US is highly developed in nonbanking financial services, but money flows in its nonbanking fields are not included in the M2 measurement. In contrast, China's financial system is bank-dominated and generates more M2 than those where nonbanking financial services prevail.

In other words, the money supply gap between China and the US may not be so wide as the gap between their M2/GDP might suggest.

Having said that, the exceptional growth in China's M2 in the past four years and its possible fallout should arouse the attention of policymakers. By the end of 2008, China's money supply measured by M2 was about 48 trillion yuan, which indicates it has doubled in just four years since then.

Meanwhile, although China's official consumer price index was 2.6 percent in 2012, the public has been complaining about the fast rise in prices in recent years, partly because the CPI calculation does not take into account house prices, a main source of public discontent.

Given the fast pace of money supply expansion in recent years, it is understandable that people are pointing their fingers at the monetary authorities for pushing up prices.

Policymakers, therefore, must take effective measures to stabilize prices to calm the public. It is high time policymakers struck a better balance between monetary expansion and inflation control.

(China Daily 02/07/2013 page8)