China’s latest official figures show that by the end of Feb., the country’s broad money supply (M2) balance reached 299.56 trillion yuan ($42.16 trillion). This figure is higher than the money supply in both the United States and the European Union (EU) combined.
M2, or broad money supply, is calculated by adding the total amount of currency in circulation, the demand deposits, and the time deposits.
According to the Chinese Communist Party’s (CCP) official data, by the end of Jan. 2024, the M2 balance was 297.63 trillion yuan ($41.88 trillion). This means that within just one month, the CCP has added 1.93 trillion yuan ($0.27 trillion) of newly issued currency.
More astonishing than the increase in money supply is the rate of growth. In 1956, China’s total money supply was 17.5 billion yuan ($7.1 billion). It took 57 years until March 2013 to surpass 100 trillion yuan ($16 trillion). By Jan. 2020, M2 surpassed 200 trillion yuan ($29 trillion) in less than 7 years. At the end of this month, China’s M2 is expected to reach 300 trillion yuan ($42.25 trillion).
Loose Monetary Policy
On March 25, Cheng-Ping Cheng, a professor of finance and economics at the National Yunlin University of Science and Technology in Taiwan, told The Epoch Times that it can be expected that China’s M2 stock will be higher after March, indicating that the CCP will continue its loose monetary policies.He explained that the CCP has adopted an expansionary fiscal policy, including the central and local governments issuing medium and long-term bonds. In monetary policy, it either increases the issuance of currency, namely M2, or further reduces the reserve ratio, and adjusts both long and short-term interest rates accordingly. This trend will not change because it aims to stimulate investment and private consumption. However, the effects of these policies are currently very limited.
“[China] will fall into a liquidity trap,” Mr. Cheng said. “The so-called liquidity trap means that the government continues to increase the money supply, but its impact on interest rates is limited. In addition, private investment and consumption remain stagnant. So, it is very difficult to get out of deflation in the short term.”
He further explained that under normal economic conditions, mass currency issuance by a government would cause inflation due to too much money chasing limited goods. However, now China is in a deflationary state, with companies unwilling to invest and consumers unwilling to spend, so the communist regime is printing money desperately. Still, the expected inflation cannot be realized since the increased money supply is not being used to promote any kind of economic activity.
Henry Wu Chia-lung, a Taiwanese macroeconomist and lead economic researcher at AIA Capital, also told The Epoch Times that governments usually loosen monetary policy in an attempt to stimulate the economy when the real economy is not good.
Excess Money Supply
Mr. Wu analyzed that China’s excess money supply is likely to remain in the financial sector, repairing the balance sheets of banks and financial institutions, rather than entering the real economy for circulation. For example, when China issues money in the form of loans, these funds increase significantly in the form of deposits and savings, instead of being used as a medium for consumption and investment.“The CCP authorities may think that the money supply is still not enough and will continue to loosen [its monetary policy], he said. “If this continues and leads to an outflow of funds, it will be reflected in the depreciation [of the Chinese yuan].”
According to official data in 2023, the amount of newly issued currency almost matched the growth numbers of loans and deposits.
Lu Yuanxing, a former Chinese entrepreneur living in exile in the United States, told The Epoch Times that the CCP’s newly issued currency has been injected through loans, and then these funds turned into deposits.
Data show that by the end of 2023, Chinese yuan loans increased by 22.75 trillion yuan ($3.23 trillion) for the whole year, while at the same time, deposits increased by 25.74 trillion yuan ($3.65 trillion) for the whole year.
Mr. Lu elaborated that commercial loans accounted for nearly 80 percent, meaning that these funds were mainly acquired by large state-owned enterprises in China. However, these funds were not invested in areas that could grow the economy. Instead, some funds were saved as deposits, and some were indirectly divided among the CCP elites. As a result, these funds cannot truly enter into circulation.
On March 22, the onshore Chinese yuan to US dollar exchange rate fell below 7.2, hitting the lowest level since Nov. 17, 2023. These fluctuations in exchange rates indicate the broader impact of the drastically increased money supply on the overall economic stability of China.
