China’s M2 growth exceeded 13% for the first time in one year

China's monetary data came in quite surprising this night. The M2 growth picked up to 13.3% y/y in July, much higher than 11.7% in the prior month and the PBoC's target of 12.0%. In fact, in Q2 monetary policy implementation report, the PBoC did alert this and said that the M2 growth is likely to accelerate soon. 

Regarding the factors driving M2 higher, we believe that it could be largely due to the local government debt swap plan, the recent rescue package in the stock market and acceleration in the infrastructure investment. The new loans were CNY1.5trn in July, doubling the market expectation of CNY750bn, pointing to fiscal support in stimulating the economy.

Aggregate financing was only CNY718bn, less than half of the new loans, which means that the off-balance-sheet financing continues to shrink. This could be related to the de-leveraging in the margin trading in the stock market. In the short term, the surge of the M2 growth will not change the direction of the monetary policy stance, given the soft growth, low inflation and even deflation in the producer price index. 

"However, as the M2 growth accelerates, the central bank could be cautions on further cut in the reserve requirement ratio. From this perspective, the cut in the policy rates could be the preferred option if the activity indicators continue to remain soft", says Commerzbank.