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BIZCHINA / Finance

China's M2 growth underestimates inflation pressure

Updated: 2007-07-12 14:44

China needs "decisive" measures to rein in excessive demand and control
inflation pressures as its M2growth has understated the speed of monetary
expansion, according to the latest report by Goldman Sachs, the U.S.
investment bank.

Growth rate of M2, a broad measure of money supply, edged down to 17.1
percent in April 2007, while M3, which includes M2, deposits in non-bank
financial institutions and securities issued by financial institutions,
picked up to 19.2 percent year-on-year.

"The M3 growth rate has been faster than that of M2 since the second
quarter of 2006, likely reflecting the fast accumulation
ofcapital-market-related financial assets," said Liang Hong, chief China
economist with Goldman Sachs Asia.

Figures from the bank show that bonds issued to non-financial
institutions grew 30 percent year-on-year in April and non-M2 deposits by
other financial institutions soared 63 percent over the same period of
last year.

In the past, M2 and M3 are used to maintain similar growth speeds due to
relatively small changes in non-M2 liabilities in the country, said
Liang, who believed a broader money supply measure like M3 would be a
more useful parameter to assess the extent of monetary expansion and to
forecast the demand, given therapid growth in capital markets.

Since the M3 growth has been hovering over 19 percent year-on-year in
recent months, she expected the economy would continue to speed up and
inflation might intensify in the near term.

The Goldman Sachs predicted the consumer price index (CPI), a major
inflation gauge, would be at 3.6 percent in 2007 and an average of more
than four percent in the rest of the year. The bank expected CPI
inflation to ease to 2.6 percent in 2008.

The China Securities Journal, citing a report from the central bank's
research bureau, reported the CPI was expected to rise 3.2 percent for
the whole of 2007, with its peak of 3.5 percent in thethird quarter.

Food prices have climbed in China this year, pushing the country's CPI to
3.4 percent in May, higher than the government's warning level of three
percent.

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