PBOC denies risk of liquidity trap
August 22, 2016 Category Finance, Weekly
The People’s Bank of China (PBOC) has officially denied China is at risk of a “liquidity trap”. Growth of M2 – a broad measure of money supply – slowed to 10.2% in July, while growth in M1, mainly cash and cash deposits, accelerated to 25.4% last month. It was the strongest monthly growth since June 2010, suggesting that a lot of money created by the People’s Bank of China was idle in corporate accounts. With or without a liquidity trap, the PBOC is facing an uphill battle to channel funds into real economic activity instead of speculation in the financial and property markets. In July, new bank loans to corporate borrowers shrank, and mortgages made up the bulk of total new credit. The National Development and Reform Commission (NDRC) said that a lot of money was not used to finance economic activity but to repay old debt and to speculate on commodities. Private investment growth slowed to 2.1% over the first seven months and the reluctance of private investors to spend on plant and equipment helped drag down the pace of overall investment to 8.1% in July. Liu Shijin, former Deputy Director of the State Council’s Development Research Center, said economic growth was “very close” to the bottom. “It’s very likely that the Chinese economy will bottom out in two or three years,” Liu said, as reported by the South China Morning Post.
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