% annual growth rate:
|1991 – 2000||24.58%||18.49%|
|2001 – 2010||18.40%||15.18%|
|Eight years to 2018||12.56%||10.13%|
Sources: M3 from the People’s Bank of China and nominal GDP from IMF database, as at May 2019
The medium-term relationship between money and nominal GDP growth in China, 1991-2018
Five-year moving averages of annual % changes, with 1993 being the start of the first five-year period
Comment on monetary trends in China
Over the last generation China has enjoyed the fastest economic growth, in a large nation, ever recorded. According to the International Monetary Fund database, the average annual rate of growth of gross domestic product was 9.8% in the 35 years 1980 to 2014 inclusive. The extraordinary growth achievement followed the shift from centralized planning and state ownership until Chairman Mao’s death in 1976 to greater market freedom and the expansion of the private ownership subsequently. A standard characteristic of economic growth is for the financial sector and the quantity of money, broadly defined, to increase more rapidly than GDP. In the generation-long Chinese boom this tendency has been reinforced by the enlargement of private ownership, since large-scale money holding (to cushion shocks) is necessary for private decision-takers but not for government ministries.
Broad money growth over the last 25 years has therefore typically run at about 20% a year, compared with a 16%-a-year advance in nominal GDP. 20%-a-year money growth has been far in excess of the numbers seen in the traditional advanced countries. Not surprisingly given the headlong pace of expansion, the banking system has often acquired low-quality assets, so that at present concerns are being expressed that a high proportion of banks’ loan portfolios are in default. However, China has ample foreign exchange reserves and hence a ‘piggy bank’ to protect itself against financial crisis. The annual growth rate of the M2 aggregate has slowed in recent years, although it did not fall below 10% until 2017. After the boom years in the first decade of this century, the contrast between money growth in China and other countries is becoming less marked.