BEIJING: The growing gap between M1 and M2 cannot be used as an indicator to evaluate whether the economy is entering a "liquidity trap," the People's Bank of China (PBOC) said on Monday.
Growth in M1 money supply, which includes cash and short-term deposits, accelerated to 25.4 percent in July from a year earlier while M2 money supply, which includes longer-term deposits, grew only 10.2 percent, its weakest growth in 15 months, raising concerns a "liquidity trap" is forming in China.
"M2 growth was distorted by a higher base of comparison boosted by money injections to calm stock market volatility in the second and third quarter of last year," the central bank said in a statement posted on its website.
M2 growth is likely to rebound in August and September as the base effects of last year's injections fade, the statement added, and it is normal to see some fluctuations in monthly money supply and credit data.
The central bank said accelerating M1 growth was due to a rise in corporate deposits, caused by low interest rates, a revival of the property market and local government debt swaps.
The gap between M1 and M2 growth "primarily reflects the change in monetary distribution among different sectors and there is direct connection with the 'liquidity trap' hypothesis," the central bank said.
"It cannot be a measure that indicates (the economy) is entering a 'liquidity trap'."
Sheng Songcheng, director of the Survey and Statistics Department at the PBOC, said last month that China has already fallen into a "liquidity trap" where increased money supply is being absorbed by firms that are not in turn investing cash.
Bank lending in July indicated a "seasonal slowdown" after banks doled out a record 7.53 trillion yuan ($1.13 trillion) in new loans in the first half of 2016, the central bank said, adding that credit data was also affected by loans extended by large- and medium-sized commercial banks for local government debt swaps, totalling 800 billion yuan so far this year.
China's banking system has ample liquidity, the statement added, and the PBOC will fine-tune monetary policy in a pre-emptive way.
The PBOC will maintain prudent monetary policies with some flexibility, the statement also said, adding the interest rate is running at a low level.
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