| In late March, China's broad money (M2) hit 103.61 trillion yuan ($16.76 trillion), posing a severe challenge to financial security and the independence of the central bank.
With the eruption of the global financial crisis, it seems that the role of central banks around the world has been shifting to stimulating economic growth rather than maintaining the stability of a currency's value.
As far as China is concerned, in the past three decades of reforms and opening up, rising economic growth and the increasing dependence of economic activities on currency and related transaction instruments have led to the acceleration of monetization and the rising ratio of financial assets against total assets in economy (the ratio of M2 against the GDP has almost reached 190 percent).
However, the monetization of the economy alone cannot explain the rapid growth of M2. Behind it is the government's currency creation mechanism. That's to say, in China, economic growth driven by government investment has resulted in the surging of M2.
Dynamic government investment has triggered strong demand for money. In the past few years, soaring government investment was mainly backed by bank credit, which had led to the dramatic expansion of bank loans. Given that China's financial system relies primarily on indirect financing, as the government keeps sharply boosting investment spending, which has significantly multiplied the currency flow of the financial system, more money has been created.
In fact, since China first published its monetary statistics caliber in 1994, the government has not been deemed as a currency holder, and the central and local governments' fiscal deposits in commercial banks have not been included in the statistics.
On the other side, since China's economic growth mainly came from investments in infrastructure construction by governments at all levels in the past two years, the bulk of the 20-trillion-yuan ($3.24 trillion) bank credit has gone to state-owned sectors and local governments.
Financial resources' excessive preference for state-owned business and their loose constraint to state-owned sectors have greatly lowered their efficiency, and thus to maintain rapid economic growth more credit and money supply are needed.
Statistics suggest, since the financial crisis, credit has risen faster than the GDP, especially after 2009, and the gap is widening. Last week, Fitch downgraded China's credit rating A+ from AA-, explaining that China's investment-and-credit-driven growth model has accumulated many financial and debt risks.
From the beginning of this year, it has become increasingly evident that infrastructure construction has contributed much to economic growth. According to statistics, in January and February, infrastructure investment increased 23.3 percent year on year, up 25.6 percentage points from the same period last year.
It has been estimated that during the 12th Five-Year Plan (2011-15) period, public investment by local governments toward urbanization would reach 30 trillion yuan ($4.85 trillion). To make these projects fully funded, credit and money supply will continue to expand.
Government-led investment will only give a push to credit expansion, and then create more money stock. From this perspective, excessive money supply cannot be curbed only by neutralizing or even tightening monetary policies. Without restraints on government investment, credit expansion will continue to spawn more risks. n
This is an edited excerpt of an article by Zhang Monan, an associate researcher with the State Information Center, published in the Economic Information Daily | 
