Surge partly due to stock market support measures
China's M2, a broad measure of money supply that covers cash in circulation and all deposits, rose 13.3 percent year-on-year to 135.32 trillion yuan ($21.4 trillion) in July, the People's Bank of China (PBC) said in a statement on its official website on Tuesday.
The rise in money supply has been triggered primarily by an increase in lending. In July, Chinese banks issued 1.48 trillion yuan worth of new yuan-denominated loans, up from 1.28 trillion yuan in June, the PBC, China's central bank, said in a separate statement on Tuesday.
According to a report HSBC sent to the Global Times on Tuesday, the growth in new yuan lending in July was mainly driven by increased lending to non-bank financial institutions as a result of the government measures to stabilize the mainland stock market.
Shao Yu, chief economist at Orient Securities, told the Global Times on Tuesday that China's non-bank financial institutions, especially the China Securities Finance Corp (CSF), a State-owned financial institution, have played a "decisive" role in lifting yuan-denominated lending and money supply in July.
The CSF was required by the China Securities Regulatory Commission (CSRC) to "raise funds from various channels" to provide liquidity for domestic securities firms, according to a statement from the CSRC on July 5.
The move was one of a batch of government strategies to prop up the mainland stock markets, which slumped dramatically in June and July.
According to a July 27 report by domestic finance information website finance.sina.com.cn, the CSF had borrowed about 1.3 trillion yuan from at least 17 commercial banks as of July 13.
The PBC statement showed that new lending to non-bank financial institutions came in at 886.4 billion yuan in July, accounting for about 60 percent of the month's new yuan lending.
But the impact of the stock market support measures on domestic money supply is expected to fade in the coming months, meaning that the growth of M2 might slow down in the future, the HSBC report said.
Shao said that another reason for the rise in domestic money supply in July was that previous government policy easing measures, including cuts in interest rates and banks' reserve requirement ratio (RRR), had "filtered through."
Shao noted that these measures could help encourage lending and increase market liquidity, but their impact on money supply is relatively small compared to that of yuan lending.
The PBC has cut benchmark interest rates and the RRR three times this year.
Shao also noted that the majority of the new lending was not flowing to China's real economy, and Chinese companies are still suffering a shortage of capital, making it likely that the government will continue to adopt loose monetary policies in the second half of 2015.
But Yu Fenghui, a financial commentator, told the Global Times on Tuesday that it's hard to say whether the government will roll out more monetary policy easing to increase liquidity levels in the near future.
"The government might replace monetary policies with stronger fiscal policies, such as tax cuts, in the future," Yu said.
This is because the level of money supply "has already reached a relatively high level. Also, most of the capital released by the interest rate and RRR cuts flowed to the capital markets, instead of lending direct support to Chinese companies," Yu noted.
New yuan lending to the domestic real economy came in at 589 billion yuan in July, down from 1.32 trillion yuan in June, the PBC noted.
