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Chart of the month

In early 2009 Chinese policy-makers embarked on an exceptionally stimulatory monetary policy. Banks were told to lend aggressively, regardless of the underlying demand for loans. The result was a burst of very high money growth, evident in the chart below in the three-month annualised rate of increase in M2 topping out at about 55% in spring 2009. Unsurprisingly 2009 was a good year for Chinese real estate and the Shanghai stock market. But 2010 and 2011 saw rising inflation, and the People’s Bank of China (i.e, the Chinese central bank) had to put on the monetary brakes. Since March last year the new president, Xi Jinping, has expressed strong concern over corruption in many walks of life, including business and finance. The monetary expansionism of 2009 is now widely viewed as a mistake. Money growth has been reined in and, on an annual basis, has been about 15% for roughly two years. Indeed, in late 2013 the monthly increases averaged less than 1%. There has to be a chance that 2014 sees Chinese money growth decelerate towards the single-digit level, acting as a check on asset prices and demand. The Shanghai stock market, as measured by the A share index, is about 40% lower than in late 2009.

Tim Congdon, Economic research, macroeconomic forecasting

Contact address: International Monetary Research Ltd., Huntley Manor, Huntley, Gloucestershire GL19 3HQ

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