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China versus US Money Supply

Posted By Barry Ritholtz On June 13, 2004 @ 7:25 am In Finance | Comments Disabled

Let’s call this a “tale of 2 different Money Supplies,” told graphically. China’s Money Supply, in raw percentage gains (monthly year over year changes) is still much higher than that of the United States.

Most noteworthy is the comparison of trend direction: We see China is slowly bringing down their rate of M2 increase. I would surmise they are heading towards a (sustainable) 12-15% annual rate of money supply expansion — while that mayy seem like a lot, it probably reasonable for a relatively young, fast growing economy.

China Money Supply Growth
china_growth_slowing_wsj
Source: WSJ [1]

The U.S. has moved towards that same level, but from the opposite side — US M2 growth was low and is now moving higher. This increase (versus China’s decrease) is partially to add liquidity to cushion impending rate hikes.

Compare the chart above with the US money supply:

U.S. M2 Spiking
m2m
Source: Dallas Federal Reserve [2]

In addition to the usual gyations, Money Supply seems spikes every 4 years just before the Presidential elections; This elction year component can be plainly seen in this chart [3], reflection stock markets’ reactions to M2 increases each Presidential election year.

Call it a perk of incumbency . . .

Here is what the WSJ [1] had to say on the subject:

“China’s runaway economy is showing clear signs of slowing, offering hope of a “soft landing” that could slacken inflationary pressures around the world on raw materials from oil to grain and avoid damaging global growth.

The world’s fastest-growing major economy reported a slew of fresh economic data yesterday suggesting that its expansion, while still strong, is moderating. The country’s leaders, through a combination of rhetoric, policy and administrative actions, have been trying in recent months to stop the economy from overheating and creating such problems as shortages, financial bubbles and inflation.

The evidence that the measures are having an effect came in many forms. China’s increase in the production of steel, autos and other industrial goods slowed in May, and growth in money supply slowed slightly. Also, investment growth for fixed assets — the kind of factory-building or real-estate development that has threatened to create gluts — slowed sharply.”

Source:
China’s Expansion May Be Easing [1]
By Andrew Browne, Matt Pottinger And Peter Wonacott
The Wall Street Journal, June11,2004;PageA2

http://online.wsj.com/article/0,,SB108683182877833518,00.html


Article printed from The Big Picture: http://www.ritholtz.com/blog

URL to article: http://www.ritholtz.com/blog/2004/06/china-versus-us-money-supply/

URLs in this post:

[1] WSJ: http://online.wsj.com/article/0,,SB108683182877833518,00.html

[2] Dallas Federal Reserve: http://www.dallasfed.org/data/data/m2m.htm

[3] chart: http://bigpicture.typepad.com/comments/2004/05/the_chart_of_th.html

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