China’s key money supply indicator, M1, showed signs of recovery for the first time in nine months, signaling a possible shift toward rising spending and investment in the economy. This marks an early sign that the raft of monetary, fiscal, and real estate policies aimed at boosting confidence are beginning to take effect.
M1 Improvement and Market Confidence
According to data from the People’s Bank of China (PBOC), M1 money supply—which includes cash in circulation and corporate demand deposits—stood at 63.34 trillion yuan ($8.79 trillion) by the end of October. Although the M1 indicator was still down 6.1 percent year-on-year, this decline was smaller than the 7.4 percent contraction recorded in September, marking the first improvement in M1 after eight months of consecutive declines.
The improvement in M1 growth suggests that market players—particularly businesses—are showing greater willingness to hold and use liquid funds. A faster pace of M1 growth typically signals more spending and economic activity, while slower growth indicates more caution and sluggishness.
Analysts, including Wen Bin, Chief Economist at China Minsheng Bank, attribute this improvement to various factors, including the residential property market’s recovery, the transfer of funds from government bonds to local government and corporate accounts, and a favorable low comparison base from the previous year. Wen pointed out that these factors have helped increase the liquidity in the economy, allowing market participants to hold more accessible funds.
M2 Growth and Investment Appetite
Meanwhile, China’s broader measure of money supply, M2, which includes M1 as well as less liquid assets like time deposits, showed a solid growth of 7.5 percent year-on-year by the end of October, up from 6.8 percent in September. The gap between M1 and M2 growth narrowed slightly, from 14.2 percentage points in September to 13.6 percentage points in October, which further suggests that businesses and market participants are increasingly willing to spend and invest.
According to Wang Qing, Chief Macroeconomic Analyst at Golden Credit Rating International, the improvement in M1 is also linked to improving market expectations. He noted that companies are now using more demand deposits for operations and investments, and that the decline in such deposits is beginning to ease.
Loan Data and Monetary Policy Outlook
Despite the encouraging signs in money supply growth, new renminbi loans in the first 10 months of the year were reported at 16.52 trillion yuan, with 500 billion yuan in new loans issued in October. However, this was still down by about 238 billion yuan compared to the same period last year. Residential lending showed signs of recovery, but corporate financing remained relatively weak, pointing to persistent challenges in driving private-sector investment.
To support economic recovery, PBOC Governor Pan Gongsheng reaffirmed the central bank’s commitment to a supportive monetary policy stance, signaling that it would continue to make adjustments to support the economy. Analysts, such as Ming Ming, Chief Economist at CITIC Securities, anticipate that the PBOC could further cut the reserve requirement ratio (RRR) in the coming months to accommodate the increased supply of government bonds.
However, interest rate cuts seem less likely given the constraints posed by banks’ net interest margins and renminbi exchange rates. Instead, the central bank may encourage commercial banks to further reduce deposit rates to ease their profit pressures and help ensure that policy rate cuts are effectively transmitted into lower financing costs for businesses and households.
Signs of Stabilization and Recovery
While there are still challenges, including weak corporate lending and high property sector debt, the improvement in M1 money supply is a promising sign that China’s economy may be stabilizing. With the PBOC continuing to fine-tune its policies and the government implementing measures to restore confidence, there are signs that China’s spending appetite is beginning to pick up, and that the broader economic recovery is gaining momentum.
In the coming months, the Chinese central bank and government are likely to continue focusing on boosting liquidity, encouraging private investment, and driving growth in key sectors, especially real estate, to support the broader economic recovery.