OPINION

Government Investment Spurs Excessive Money Supply

In late March, China's broad money (M2) hit 103.61 trillion yuan ($16.76 trillion), posing a severe challenge to financial security and the independence of the central bank.

With the eruption of the global financial crisis, it seems that the role of central banks around the world has been shifting to stimulating economic growth rather than maintaining the stability of a currency's value.

As far as China is concerned, in the past three decades of reforms and opening up, rising economic growth and the increasing dependence of economic activities on currency and related transaction instruments have led to the acceleration of monetization and the rising ratio of financial assets against total assets in economy (the ratio of M2 against the GDP has almost reached 190 percent).

However, the monetization of the economy alone cannot explain the rapid growth of M2. Behind it is the government's currency creation mechanism. That's to say, in China, economic growth driven by government investment has resulted in the surging of M2.

Dynamic government investment has triggered strong demand for money. In the past few years, soaring government investment was mainly backed by bank credit, which had led to the dramatic expansion of bank loans. Given that China's financial system relies primarily on indirect financing, as the government keeps sharply boosting investment spending, which has significantly multiplied the currency flow of the financial system, more money has been created.

In fact, since China first published its monetary statistics caliber in 1994, the government has not been deemed as a currency holder, and the central and local governments' fiscal deposits in commercial banks have not been included in the statistics.

On the other side, since China's economic growth mainly came from investments in infrastructure construction by governments at all levels in the past two years, the bulk of the 20-trillion-yuan ($3.24 trillion) bank credit has gone to state-owned sectors and local governments.

Financial resources' excessive preference for state-owned business and their loose constraint to state-owned sectors have greatly lowered their efficiency, and thus to maintain rapid economic growth more credit and money supply are needed.

Statistics suggest, since the financial crisis, credit has risen faster than the GDP, especially after 2009, and the gap is widening. Last week, Fitch downgraded China's credit rating A+ from AA-, explaining that China's investment-and-credit-driven growth model has accumulated many financial and debt risks.

From the beginning of this year, it has become increasingly evident that infrastructure construction has contributed much to economic growth. According to statistics, in January and February, infrastructure investment increased 23.3 percent year on year, up 25.6 percentage points from the same period last year.

It has been estimated that during the 12th Five-Year Plan (2011-15) period, public investment by local governments toward urbanization would reach 30 trillion yuan ($4.85 trillion). To make these projects fully funded, credit and money supply will continue to expand.

Government-led investment will only give a push to credit expansion, and then create more money stock. From this perspective, excessive money supply cannot be curbed only by neutralizing or even tightening monetary policies. Without restraints on government investment, credit expansion will continue to spawn more risks. n

This is an edited excerpt of an article by Zhang Monan, an associate researcher with the State Information Center, published in the Economic Information Daily

THE MARKETS

Sales Leap

Nu Skin Enterprises, one of the world's top five direct-selling companies, expects its sales in China to exceed $1 billion this year and to achieve five-fold growth in the coming five years.

The anti-ageing product developer, manufacturer and seller is eyeing opportunities brought by China's ageing society and growing individual incomes, according to Vincent Cheng, regional Vice President of West & North Mainland, Nu Skin Greater China.

"We have full confidence of reaching that goal," he said, adding that his company had planned to increases sales to $1 billion in 2014 from $200 million in 2009.

To reach that goal, Nu Skin opened up regional office in Shanghai. The office is for the Chinese mainland, Hong Kong, Macao and Taiwan, and is the company's first regional base outside its home market, the United States.

Overseas Acquisition

China's largest residential developer China Vanke will spend 135.5 million Singapore dollars ($109.3 million) acquiring a 30 percent stake in a residential development project in Singapore, its strategic partner Keppel Land Limited, said on April 16.

Vanke said it is the company's first investment in Singapore.

Keppel Land and Vanke have entered into a strategic partnership that will see both companies jointly develop properties in Singapore and China, Keppel Land said.

Vanke, through a wholly-owned subsidiary, will acquire the 30-percent stake in a condominium development project in Tanah Merah in eastern Singapore from a subsidiary of Keppel Land, which was awarded the residential site for 434.55 million Singapore dollars ($348.84 million) in October last year.

Keppel Land said it was looking forward to the strategic partnership to help grow its businesses in China as Vanke has operations in almost all big cities in China.

The project, comprising 726 residential units, is expected to be launched in the second half of 2013.

NUMBERS

5.42 mln

Automobile sales in Q1

29.18%

Market share of domestic brand cars in Q1

66.34%

Proportion of sales by the top 10 carmakers in Q1

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