Source: China money market.

abstract

20 19 a high-frequency word in China's financial market is "wide money, tight credit". The data shows that the broad money supply M2 entered the "8" era from the end of 20 17, and the M2 published on 20 1 1 was 8.2% year-on-year. In terms of figures, the year-on-year growth of 8.2% broad money is not low, but the feeling of financial market is still tight.

Then a natural question is, what kind of currency growth rate is more appropriate? Why does the current currency liquidity give market participants a tight feeling? What is the reason for this tension? Looking forward to 2020, what kind of picture may China's monetary liquidity present?

First, the quantitative analysis of currency liquidity

Firstly, a basic problem is analyzed theoretically. How to plan money supply? The answer to this question depends on the goal of monetary policy.

According to the traditional monetary theory, the goal of monetary policy is to pursue inflation balance and economic growth, so a simple understanding of monetary growth rate can roughly cover the sum of economic growth rate and inflation rate (simply expressed as M2=GDP+CPI). However, there are obvious contradictions between this theory and China's practice.

Figure 1 shows the difference (M2-GDP-CPI) between m2 and China. According to monetary theory, the difference between the three should fluctuate around zero all the year round. The difference of figure 1 is positive all the year round, and the amplitude is quite large, especially in 2009, showing a peak shape. At its peak, the growth rate of M2 exceeded the sum of GDP and CPI by 23%, which was a substantial increase in the money supply. Many scholars and analysts believe that this is a proof of China's "currency overshoot".

Figure 1 M2-GDP-CPI( 1995 till now)

Unit:%

Note: All data are year-on-year data; GDP data is quarterly data, and the author smoothly converts it into monthly data.

Data source: wind information, compiled by the author.

However, it is not comprehensive to use M2-GDP-CPI to measure "currency overshoot".

On the one hand, different theories are applied at different stages of development. M2=GDP+CPI monetary theory is based on a mature market economy environment, which is based on the premise of stable economic growth. In other words, it is based on developed and mature economies. However, China is a developing country with a long-term rapid economic development. In this process, a large number of unallocated resources are "monetized". Therefore, M2=GDP+CPI is not suitable for measuring the monetary demand that needs to be formed in the stage of rapid economic development in China.

On the other hand, it is the neglect of asset prices. A widely criticized problem of M2=GDP+CPI formula is that it does not fully consider the changes in asset prices. In recent years, the world's major central banks have gradually made asset price stability one of the goals of monetary policy. In fact, the demand for money formed by rising asset prices has accounted for a large part of the money supply.

Objectively speaking, for a long time in the past, there was indeed an "excess" in China's money supply, which made China's money liquidity very abundant, thus stimulating economic growth. However, with the transformation of China's economy from high-speed development to high-quality development, this situation is changing.

The government work report of 20 19 pointed out that "the growth rate of M2 and social financing scale should match the nominal GDP growth rate", which further clarified the money supply planning after the government work report of 20 18 no longer mentioned the M2 growth target, and also predicted that the formula of M2=GDP+CPI would become the monetary liquidity policy orientation of China's economic development in the future.

Its background is the change of monetary policy framework under the adjustment of economic structure, from quantitative to price, which affects the feeling that financial markets, especially capital markets, are "tight" on monetary liquidity.

Secondly, currency liquidity exerts downward pressure on asset prices.

At present, money market and capital market have very different feelings about money liquidity. Relatively speaking, the liquidity of the money market is relatively sufficient, but the capital market generally feels "tight".

In terms of broad money supply, the "tightness" of the capital market is also traceable. Enlarge the part of figure 1 after 20 13 to form figure 2. The value of M2-GDP-CPI in China changed from positive to negative in the fourth quarter of 20 17, which indicated that the money supply could not cover economic growth and price fluctuation. In the following two years, M2-GDP-CPI only briefly returned to positive value at the beginning of 20 19.

A natural question is, what does negative M2 GDP CPI mean? The author's point of view is that the money supply is not enough to cover the growth of the real economy and the fluctuation of consumer goods prices, thus implicating the downward trend of asset prices.

Figure 2 M2-GDP-CPI(20 13 till now)

Unit:%

Note: GDP data is quarterly data, and the author smoothly converts it into monthly data.

Data source: wind information, compiled by the author.

This is not difficult to understand. From the last article, we can see that there has been a certain degree of "currency overshoot" in China for a long time, and the possible destination of "currency overshoot" is the monetization of resources and the rise of asset prices. If the resources without monetization are regarded as an asset, the process of monetization is the process of asset price from zero to transaction price. Then the "super-currency" in these two places can be regarded as the rise of asset prices.

The author uses API to express the asset price index, and expands the above M2=GDP+CPI into M2=GDP+CPI+API. Backward, API=M2-GDP-CPI, and this formula represents the difference operation of Figure 1 and Figure 2. It can be clearly seen from Figure 2 that M2-GDP-CPI is negative after the fourth quarter of 20 17, but the magnitude is not large. However, after entering the fourth quarter of 20 19, the negative value suddenly increased, reaching about -2.5%. In the capital market, the real performance is that the stock market, bond market and the largest real estate market have all experienced different degrees of price decline, with the shadow of liquidity contraction behind them.

This may be the digital explanation that the current capital market feels that the currency liquidity is "tight", because the money supply is no longer enough to cover economic growth and price fluctuations, so some liquidity is withdrawn from asset prices to make up for the first two.

It should be pointed out that there is no unified opinion on whether M2=GDP+CPI+API is established. However, most researchers believe that the rise in asset prices represented by real estate has absorbed a large number of "super-issued" currencies.

Third, the reasons for the contraction of currency liquidity.

The downward pressure on asset prices is due to the lack of liquidity provided by the overall money supply, which I call monetary liquidity contraction. What is the cause of shrinkage?

Theoretically, the formation of broad money includes two links: currency issuance and currency creation. As mentioned above, currency issuance is determined by the issuance rules and plans formulated by the central bank's monetary policy, mainly by the central bank's judgment on macroeconomic growth and price fluctuations; Currency creation is jointly created by commercial banks and enterprises, which is mainly influenced by the economic prosperity. The more prosperous the economy is, the more times the base money turns over in a certain period, and the more money is created in a broad sense, and vice versa.

Considering that foreign exchange has been the main channel for the People's Bank of China to invest money for a long time after 200 1 China joined the WTO. The author sorts out the data of M2 total amount (actual money amount), foreign exchange account (foreign exchange account of China People's Bank) * money multiplier to describe the theoretical money supply, and draws it as Figure 3.

It can be clearly seen from Figure 3 that before the second quarter of 20 14, the total amount of M2 almost coincided with the theoretical amount of money after the currency multiplier of foreign exchange, but it diverged slightly around 2009, which was influenced by China's 4 trillion stimulus policy in 2008. However, from the third quarter of 20 14, the monetary multiplier of the total M2 and foreign exchange holdings began to deviate obviously and never overlapped again.

The reason can be derived from the total balance of payments in Figure 3. Since 20 14, China's total balance of payments has fallen sharply, which means that the foreign exchange inflow under the foreign exchange account channel has fallen sharply, thus blocking the money supply channel. Especially after the "8 1 1" exchange rate reform in 20 15 years, the foreign exchange reserves fluctuated greatly, which reduced the money supply under the foreign exchange occupation channel.

Figure 3 M2. Foreign exchange reserves and balance of payments (2000-present)

Unit: 100 million yuan

Note: The total balance of payments data is quarterly data, and the author made a smooth conversion in order to decompose it into monthly data.

Data source: wind information, compiled by the author.

Also in the third quarter of 20 14, the People's Bank of China created the medium-term loan facility MLF, and then in the second quarter of 20 15, it created the mortgage supplementary loan tool PSL. The author added them together. In Figure 3, the balance between them is indicated by purple lines, and there is no obvious feature.

However, when the author adds the sum of MLF and PLS to the foreign exchange holdings and then multiplies it by the currency multiplier, it is found that the theoretical monetary amount of the new (foreign exchange holdings +MLF+PSL)* currency multiplier almost coincides with the total amount of M2. It shows that the main channel of money supply in China has changed from foreign exchange to "foreign exchange+money delivery tools created by the central bank".

At this point, we get an important reason for the recent contraction of currency liquidity: the switching of money delivery channels and the change of China's balance of payments pattern behind it, from double surplus pattern to small surplus under trade, small deficit under capital and overall balance. This change makes the capital market, which has long been accustomed to being immersed in the double surplus and wide monetary environment, no longer adapt.

Another important factor in the contraction of currency liquidity is the link of currency creation. At this stage, from the external environment, the global political pattern has undergone major changes, economic development is facing greater uncertainty, and financial risks are rising; From China's own point of view, China is in a critical period of changing its development mode, optimizing its economic structure and transforming its growth momentum. Structural, institutional and cyclical issues are intertwined, the influence of "three-phase superposition" continues to deepen, and the downward pressure on the economy increases. Two factors make the whole economy present a certain degree of "pessimistic expectation", which affects the degree and speed of money creation. Especially in recent years, the investment of private enterprises in China has declined rapidly, which has weakened the money creation in this sector.

Fourth, the outlook of currency liquidity in 2020.

Looking forward to 2020, the author is still cautiously optimistic about China's monetary liquidity. It is estimated that in 2020, China's currency liquidity will maintain the general trend of 20 19, that is, the pattern of M2=GDP+CPI will remain basically unchanged, which is in line with the government work report that "the growth rate of M2 and social integration should match the growth rate of nominal GDP", and the liquidity tension in the capital market will continue. The reason for this is the following：

First of all, the channel of money delivery needs to be clear. It is a general trend that foreign exchange has not adapted to the main channel of money supply needed by China's current economic development. In fact, China should cultivate its own currency issuance system and credit rules of big countries. At present, it is a temporary transitional measure to supplement the money supply with MLF and PSL. In the short term, the People's Bank of China will continue to use this transitional means.

However, the People's Bank of China will certainly maintain a prudent monetary policy and will not abuse it for flood irrigation. At the same time, the space for fully relaxing monetary policy is also very limited. Therefore, the source of monetary liquidity will not be greatly relaxed, which limits the possibility of monetary liquidity being greatly relaxed.

Secondly, the domestic and international economic environment is difficult to get out of the predicament in the short term. It is difficult for the domestic and international economic environment to improve obviously in the short term, which makes the investment confidence of entrepreneurs in the future only slowly recover, and the link of currency creation, especially the link of currency liquidity entering the real economy, also slows down, thus affecting the improvement of the economic environment. Judging from the overall economy of China, it will take a long time to replace the original investment-driven economic growth with endogenous economic structure, and the development of endogenous economic factors will be decided during this period.