An overview of the effects of monetary policy in China on GDP and inflation, from 1991 to the present day.

% annual growth rate:

  M3 Nominal GDP
1991- 2022 17.33% 14.08%
1991 - 2000 25.19% 18.43%
2001 - 2010 18.40% 15.18%
2011 - 2020 11.63% 9.52%

Sources: M3 from the People's Bank of China and nominal GDP from IMF database, as at September 2023

The medium-term relationship between money and nominal GDP growth in China, 1991-2022

Five-year moving averages of annual % changes, with 1993 being the start of the first five-year period

Comment on monetary trends in China

For an entire generation,  China enjoyed the fastest economic growth ever recorded in a large nation. 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. This extraordinary achievement followed the shift from centralized planning and state ownership (which was a feature of the country until Chairman Mao’s death in 1976) to greater market freedom and the expansion of the private sector. A consistent 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 growth 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 developing countries is becoming less marked.

In 2020, China became for a while the epicentre of the coronavirus pandemic and the authorities shut the country down for a couple of months and eased monetary policy to tide the country through this period. The pandemic was successfully contained apart from a few local outbreaks, which were dealt with by lockdowns only in the cities concerned. Consequentially, China’s economy has suffered far less than that of many developed nations. It was one of few countries not to suffer a fall in GDP in 2020 and inflation remains subdued, even though the country has returned more or less to normal. The fiscal and monetary response to the pandemic was relatively modest for an economy of this size, so the lack of a resultant inflationary spike is unsurprising.