Rising money supply in China, both M1 and M2 reflect that the economy’s banking deposits are undergoing structural changes.

In the latest monetary statistics released by the People’s Bank of China on May 13, a smaller-than-expected loan growth did not surprise markets, given renewed concerns over deleveraging , the divergent development between the two measures of money supply, M1 and M2, has gained a lot of attention, ANZ reported.

M1 recorded a rapid growth of 22.9 pct y/y, the highest level since 2011, suggesting that the previous surge seen in March (22.1 pct y/y) was not a one-off incident. However, the conventional gauge of China’s money supply, M2 data, printed worse than market expectations, with the growth rate at 12.8 pct in April compared to 13.4 pct in March and 13.5 pct market consensus, data released showed.

"Looking deeper at the change, we think it is driven by corporate hoarding of cash and investing in short-term financial products, and the booming housing market," ANZ commented in its recent research note.

Economic growth in China has slowed. The market is now adapting to an ‘L-shaped’ growth path, rather than a ‘U-shaped’ or ‘V-shaped’ recovery. The tightness in lending is expected to reduce the possibility of a near-term growth rebound. With loan extensions constrained by the tightened lending policy, banks will likely allocate more of their assets to the bond market, the report mentioned.