Today, let’s talk about something rather opaque, China’s monetary data. In May, China recorded a historical low M1 growth data of negative 4.2%, lowest since the forex reform of 1994. Well, if you are a China bear, then congratulations, this is the perfect data for you to boast around for the next few months or so. Yet it seems that no one is interested to talk about what’s inside China’s M1 data? Is there a better alternative to read it? What should a non-investment professional pay attention to when it regards to these monetary data of China? What longer-term issues do China face when it comes down to monetary policy?
First of all, China’s M1 data, it’s different from the rest of the world, as it doesn’t include consumers’ checking account. What? Isn’t M1 supposed to calculate consumers’ checking account as according to OECD’s definition, include banknotes and coins (M0) as well as deposits that are readily available to pay bills or consume goods. China doesn’t include personal checking account, due to the fact that in the early days, all deposits are called “deposit account” (储蓄存款) in Chinese. And the most amazing fact is, China never experienced a phase where debit or credit cards are the major payment methods. So, either China’s consumers used cash for their payments, and then they leapfrogged into a cashless society. This is awkward for central bankers, since they don’t even have good account of cashless payment data, until 2017 when China‘ netsunion clearing corporation (网联）were able to grasp all data from third-party platforms, the most prominent ones, being Alipay and Tencent wallet.
Yet, up till today, China’s M1 data still doesn’t incorporate these data, mainly due to the fact that apple-to-apple comparison may be complicated. As well as changing one data is useless, unless you reform the entire system. Fortunately, Pan Gongsheng, governor of PBOC, announced in the 2024 Shanghai bund’s finance forum, that China will reform its M1 data, as it doesn’t reflect China’s real economy, especially in the sense of digital payment and short-term money management behaviours, or as he put it “personal checking account and some investment products with direct payment purposes, should be incorporated”.
Now, our listeners may want to know right now, what’s the quantum of digital account or money management funds as a whole in China. CICC’s recent report gave us some good clues: 1-day cash management products, which means you are able to redeem almost instantly, amounted to 11.3 trillion RMB, a 15.8% YoY. Non-bank online payment volume amounted to 340.3 trillion RMB on an annual basis in 2023, which means, about 1 trillion RMB of payment in China happened online on a daily basis. In order to facilitate payments, 3rd party tools, such as Alipay and Tencent pay, needs to put a provisions account on central bank’s balance sheet, which in this case amounts to 2.3 trillion RMB in April 2024, roughly 2.5x of average daily volume.
China’s consumer checking deposit amounted to a further of 38.8 trillion RMB. So, if we incorporate these into the M1 growth data as a whole, in April 2024, M1+ actually amounted to 1.9% YoY, which is similar to end of 2023.
Ok, now we know that at least the consumer sector as a whole is resilient in a macro setting. The real issue is still corporate checking account, which saw a 12.5% decline from last year. Now, China has banned “yield arbitrage” in 2024, which means the bank offers a super competitive yield on checking, so that corporates are willing to put their money in the bank. So this weak data has quite a lot to do with this. That being said, it certainly also means that the real estate sector is still weak, and people are not buying properties as robust as it used to be, which contributed to a great degree China’s growth in corporate checking deposit.
So, is there a better alternative to read China’s monetary data? I am not so interested in those monthly fluctuations as I am no longer in the sell-side , where people have to make a point on a daily basis to validate their existence. But there’s one data that caught my eye: everyone said Chinese people are poorer since covid. This is complete nonsense. Personal sector’s deposits increased from 82 trillion RMB to 138 trillion RMB, roughly 15% CAGR. However, if you look at consumer spending, it only increased from 41 trillion RMB to 47 trillion RMB, a mere 3% increase CAGR. Rather than saying Chinese people are poorer, it’s clear that it’s a matter of confidence, or at least people are worried about the future. If this trend continues, China won’t have a good economy in the foreseeable future, simply because, the savings are “wasted” in the banking system, creating zero leverage and movements within the economy. That’s what non-investment professional who’s within China should pay attention to greatly. Another interesting datapoint in May, China’s beef and lamb prices dropped 9.2% and 6.1% yoy in the first five months, whereas pork remains resilient. Now, this shows Chinese consumers are ready for the rainy days, cutting their high-end protein intake into more conservative ones.
On a longer-term, what’s the real issue for China? I think it’s still the fiscal problem, where if you look carefully into 2024’s China fiscal budget. There is a sizeable gap of 3-4 trillion RMB, currently being filled by local government debt extension. It’s pretty much on track, but the issue is, either the central government acknowledges the fact that every single year, there will be such an extension, which will inevitably increase China’s overall indebtedness. Or, China needs to think of a better way to raise capital for local governments. My answer to this is through the equity market, which everyone currently is very bearish about. My bold prediction is that China’s equity market cap will need to expand on a 15-20% CAGR over the next 5-10 years, so that China’s fiscal sustainability will be solidified. It’s a daunting task for the current administration, but I am getting more confident since Wu Qing took over as the CSRC head. So far, my assessment is that he is doing all the right moves, with clear mind and strong support from his superiors. If he’s able to clean the table within the next year or so, I believe all investors will be astonished by how the market pivots from today. Well, that’s a lot for the first episode, so I will save something for the next one.
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