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UPDATED: April 1, 2013 NO. 14 APRIL 4, 2013
The supply of renminbi should be determined by the demands of the economy
By Lan Xinzhen

MONEY MATTERS: A clerk at the Agricultural Bank of China in Qionghai, Hainan Province handles deposits for a client. Debate continues to rage on as to whether China issues too much of its currency (MENG ZHONGDE)

China's broad money (M2) stood at 99.86 trillion yuan ($16.08 trillion) at the end of February, a year-on-year increase of 15.2 percent. The data released by the People's Bank of China, the country's central bank, has drawn the attention of economists from home and abroad. Since China's amount of M2 ranks first in the world—1.7 times the figure in the United States and almost one fourth of the world's money supply—many say that China's money issuance pushes up global inflation.

Is China over-issuing money? Is China the cause of global inflation? Will China change its monetary policy under the pressure of world opinion? All these questions are testing policy-makers from China's central bank.


At the First Nobel Economists Summit of China held in Beijing on March 18-19, famous Chinese economist Cheng Siwei said once again that China is over-issuing money and warned against risks of excessive money supply in the nation. "The biggest impact of money oversupply on the economy is inflation," he said.

Li Daokui, Director of the Center for China in the World Economy at Tsinghua University, is one who believes that "there is a serious oversupply of money in China." China's M2 soared from 18.5 trillion yuan ($2.98 trillion) at the end of 2002 to the present 99.86 trillion yuan ($16.08 trillion). Globally, China's M2 ranks first. In comparison, M2 in the United States, which ranks second, only stood at $9 trillion. China surpassed the United States in M2 in 2009 when China was implementing its 4-trillion-yuan ($637.96 billion) stimulus package. Even in 2012 when China tightened its monetary policy, its money supply was still high. Its newly added M2 accounted for 46.7 percent of the world's total.

"An excessively large money stock will bring some risks, such as high inflation, asset price bubbles and the outflow of capital," Li said.

The ratio of M2 to GDP is a reference for the over-issuing of money by some economists. Zhu Baoliang, Director of the Department of Economic Forecast of the State Information Center, says in China, the ratio has kept rising for years. In comparison with figures in other countries or its previous figures, China is printing money on a large scale. At present, China's M2-to-GDP ratio is 200 percent, while the ratio is only 60 percent in the United States.

Zhu says China has paid dearly for over-issuing money during its period of stellar economic growth. Ordinary people have suffered in particular: The high inflation rate and high housing prices swept away the benefits they would normally get from rapid economic growth.

A moderate amount

Central bank governor Zhou Xiaochuan denies over-issuing exists in China. "Normally in countries with a high savings rate, M2 is often high. China's savings rate is among the highest worldwide," Zhou said at a press conference during the First Session of the 12th National People's Congress in March. He added that China has properly controlled its money supply during the past few decades.

Yang Tao, a research fellow at the Institute of Finance and Banking of the Chinese Academy of Social Sciences, thinks it is not reasonable to compare China's M2 with that of other countries because renminbi is not yet fully convertible. For this reason, the renminbi supply created through domestic economic development store up within the country. Furthermore, China's massive trade surplus as well as foreign exchange reserves brought into the country via foreign investment must enter the domestic market after changing into renminbi, further increasing the supply of renminbi in China. However, in Europe, the United States and Japan, whose currencies are international reserve currencies, the increased money supply brought by an eased monetary policy can flow to other countries via international trade and overseas investment, reducing stockpiles of domestic currencies in their countries. As a result, China's money supply is higher than those in developed countries.

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