China's broad money supply covering cash in circulation and deposits, also known as M2, was up 13.8 percent year-on-year to 97.42 trillion yuan ($15.62 trillion) at the end of 2011, more than any other country on earth and the equivalent of nearly one quarter of the world's overall money supply, according to figures from the country's central bank.
In order to keep its excessive money supply from shrinking the value of the cash in people's hands through inflation, China needs to ease its reliance on investment-driven growth and bank lending.
With a limited number of financing vehicles available to domestic enterprises, many businesses in search of money have been forced to resort to bank borrowing, which has in turn prompted the People's Bank of China (PBC), the country's central bank, to push more money into commercial lenders looking to meet the market's demand for credit.
According to central bank data, the nation's bank loans accounted for 52 percent of total nationwide fundraising last year, much higher than in most developed economies, including the US, where this figure stands at less than 20 percent.
Compounding matters is the fact that domestic businesses are now becoming more inclined to seek out loans as the country's economy gradually pulls out of the downturn seen during much of last year. In fact, PBC figures released on February 8 show that new loans in January stacked up to 1.07 billion yuan, the highest monthly total in three years.
If the country can expand access to direct financing options, such as corporate bonds and equity placement, the demand for funding from corporate China will have less of an affect on the base money supply in the market.
At the same time, dampening the country's emphasis on investment as an economic driver would also drain the country's money surplus.
For years, policy makers and planners have been encouraging domestic manufacturers to expand their output. Yet, this has propelled output well ahead of domestic demand - China's domestic consumption accounted for only 35 percent of its GDP growth between 2008 and 2011, well below levels seen in most developed countries. Even when this figure rose to 51.8 percent last year, China still lagged behind many other large economies.
To ease overcapacity in the face of sluggish demand at home, many manufacturers had little choice but to try to offload their unneeded inventories abroad. To facilitate such exports though, the country had to steadily expand its yuan supply to prevent the currency's value from going up too quickly at a time when the dollar was weakening on quantitative easing moves in the US. This kept Chinese goods competitive in the global market, but cut into the wealth of its citizens.
To do something about this problem, leaders need to focus on bolstering domestic consumption, which will transform economic growth into a force that benefits the public in a real sense.
The author is an economics researcher with China's State Information Center. [email protected]
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