Data shows that China’s money supply runs faster than GDP.

The broad money supply (M2) balance was 93.64 trillion yuan at the end of October, 2012, with a year-on-year growth of 14.1 percent, according to statistics published by People’s Bank of China on Nov, 12. However, the growth of GDP in the same period didn’t exceed 8 percent.

If calculated under the central bank’s target of 14 percent year-on-year growth rate of money supply, China’s M2 balance will break 97 trillion yuan by the end of this year. And the number is very much likely to approach or even exceed 100 trillion yuan by the end of the first quarter next year. This number was merely 47.52 trillion yuan by the end of 2008, realizing a “doubling” spending only four years.

“Excessive money issuance” leads to widespread controversy

“We can see that since 2009 money supply has shown a sharp increase, the issuance of money has been seriously excessive,” said Zhu Haibin, Chief Analyst of JP Morgan China.

Experts say that the major guideline when central bank determines annual money supply is: M2=GDP+CPI+X, thus adding a variable “X” upon nominal economic growth. The existence of variable “X” is mainly due to the monetization of properties (mainly lands).

Wu Xiaoling, former vice president pointed out that with the basic completion of monetization and development of direct financing in China, and along with the implementation of prudent monetary policies, the gap between M2 and the sum of GDP and CPI growth should decrease gradually.

The accumulation of “X” and CPI for over 20 years made the ratio M2/GDP reached 181 percent, compared to that of 86 percent of America.

Nevertheless, analysts hold different point of views.

Underestimation of GDP and CPI?

A number of economic practitioners hold that GDP and CPI are underestimated. “China’s M2/GDP ratio being higher than that of America reflects more of the undeveloped capital market of China, not excessive money issuance,” said Wang Qing, general manager of investment banking department of China International Capital Co. Ltd. ,“China’s M2 mainly reflects demand on deposits and financial wealth. If you add America’s stock market, bond market and money market together, the asset scale of those markets is much larger than that of China. China’s M2 is fundamentally all its financial assets.”

As early as 1991, current vice president of central bank Yi Gang analyzed why M2 was much higher than the sum of GDP and CPI. He pointed out the “excess money” (“X”) was mainly absorbed by monetization driven by market reform. The “monetization” means the additional money supply brought by additional money demand from the increased township enterprises and private enterprises.

Experts also analyze that one explanation is the underestimation of GDP and the other is the underestimation of CPI.

Zhu Haibin was apt to agree with the latter,“We only take in house rentals into CPI calculation but exclude house prices. As a result, part of the excessive money issuance might have been absorbed by the real estate market (including lands).”

However, since 1990, the money supply has risen nearly over 60 times, and the growth of CPI was not that large. Thus some scholars hold that the underestimation of GDP is also an important factor.

Grey income conceals real currency

Furthermore, experts also say that grey income should be taken into consideration. That part of funds exists in forms of cash and equivalents in most of the time.

Actually, the government has never estimated the value of grey income. This part of income should be paid more attention to and won’t lead to hyperinflation as they are stocked in the way of cash, gold and cultural relics inside homes.