Central Gold October financial data review: The meaning of the reverse relationship between deposits and M2

CICC released a research report stating that the most noteworthy financial data in October was the rebound in the growth rate of money supply. An important phenomenon in the analysis of money supply this month is the decrease in deposit growth rate but an increase in M2 growth rate. The main factors driving the increase in money supply growth are the changes in fiscal spending and risk asset allocation. The impact of changes in risk asset allocation on money supply may be as significant as fiscal deposit spending. The decrease in deposit growth rate should also be taken seriously, and corresponding to this is the need to increase financing growth rate. To sustain the improvement in money supply, fiscal expansion remains the most important factor. Key points from CICC are as follows: The most noteworthy financial data in October was the rebound in money supply growth, with noticeable rebounds in the growth rates of M1 and M2. In October, the year-on-year growth rate of M2 increased from 6.8% in the previous month to 7.5%, reaching a new high since April of this year. The annualized month-on-month growth rate reached 12.1%, a new high since the first quarter of 2023. At the same time, the growth rate of M1 also rebounded: the year-on-year growth rate of M1 rose from -7.4% in September to -6.1% in October, with a month-on-month growth rate of 0.9%, turning positive for the first time in seven months. An important phenomenon in the analysis of money supply this month is the decrease in deposit growth rate but an increase in M2 growth rate. The growth rate of RMB deposits in October decreased from 7.1% in September to 7.0%, but the M2 growth rate increased from 6.8% to 7.5%. This means that some non-M2 deposits have been converted into M2. There are mainly two differences between RMB deposits and M2. The first is fiscal deposits, which is relatively easy to understand, meaning funds held by the government in the treasury are not included in M2. The other is non-fiscal sector-held deposits that are not included in M2, mainly consisting of transfers such as other complex deposits, as well as RMB deposits held overseas. The main factors driving the rebound in M2 are fiscal deposit spending and changes in risk asset (stock market, property market) allocation. The impact of changes in risk asset allocation on money supply may be as significant as fiscal deposit spending. Specifically: The growth rate of fiscal deposits in October decreased significantly, possibly boosting the year-on-year growth rate of M2 by 0.2-0.3 percentage points. Fiscal expenditure led to a decrease in fiscal deposits and an increase in the M2 growth rate, but did not affect total deposits. In October, new fiscal deposits were 595.2 billion yuan, significantly lower than the 1.37 trillion yuan and 1.14 trillion yuan in the same period in 2023 and 2022 respectively. The year-on-year growth rate of fiscal deposits fell sharply from 14.9% in September to 1.0% in October, indicating accelerated fiscal spending. Considering government bond issuance and changes in fiscal deposits, this factor contributed 0.2-0.3 percentage points to the improvement in the M2 growth rate in October. The acceleration of fiscal spending will also boost actual expenditure, which may also contribute to M1, but this impact is not easily quantifiable. After deducting fiscal deposits, the growth rate of total deposits improved, but the improvement was significantly smaller than the improvement in M2 growth rate, indicating that there are other factors influencing the changes in deposit structure. Another possible reason is the adjustment of deposit structure driven by changes in risk asset allocation. A noticeable feature of deposits in October was that funds flowed from residents and enterprises to non-bank financial institutions. In October, non-bank financial institutions saw a net increase in deposits of 1.08 trillion yuan, while resident deposits decreased by 570 billion yuan and enterprise deposits decreased by 730 billion yuan. The bank speculates that the private sector (including financial institutions) may have reduced their allocation of deposits that offer high returns and are not included in M2 (such as transferable deposits), or reduced their allocation of overseas RMB deposits. In this process, the private sector (and possibly financial institutions) may have chosen to redeem or not renew their high-yield deposits, or repatriate their foreign RMB deposits to use the funds to buy stocks or real estate. In September, a decrease in RMB deposits held overseas was observed, which may continue in October. During this process, deposits that were previously not included in M2 will now be classified as other types of deposits included in M2. According to calculations, the impact of this on M2 may be around 0.5 percentage points. A similar phenomenon occurred in February of this year: after deducting fiscal deposits, the growth rate of total deposits in February decreased by 0.5 percentage points compared to January, but the M2 growth rate remained unchanged at 8.7%, accompanied by a significant increase in the stock market. The rebound in M1 is a result of changes in risk assets and fiscal deposit spending, with the role of risk assets possibly being as significant as fiscal spending. M1 growth can be divided into two parts: the supply growth of M2, and the proportion of M1 to M2. The improvement in M2 growth rate contributed to around half of the improvement in M1 growth rate (0.7 percentage points out of 1.3 percentage points), with 0.5 percentage points of this contribution coming from changes in risk asset allocation. The proportion of M1 to M2 contributed around the other half of the improvement in M1 growth rate (0.6 percentage points), with 0.2 percentage points coming from changes in real estate transactions. The factor with the biggest direct impact on the proportion of M1 to M2 is new home transactions in the real estate sector. China's M1 mainly consists of current deposits and cash of enterprises and institutions. New home transactions are the largest way for resident deposits to be transferred to enterprises. Another notable phenomenon in October was the active real estate transactions, with the national new residential property signings increasing by 0.9% year-on-year in October, a 12.5 percentage point increase from September, marking the first growth after 15 consecutive months of decline since June last year. Medium and long-term loans to the household sector also saw a year-on-year increase in October, resulting in overall new financing by the household sector turning positive. According to calculations, if we assume that funds from residents purchasing new homes all become current deposits of enterprises, then the contribution of the improvement in new housing transactions to the growth rate of M1 can reach 0.2 percentage points. Taking into account the contribution of risk assets to the improvement in M2 growth rate (0.5 percentage points), combined with the impact of real estate transactions on M1 (0.2 percentage points), the contribution of risk assets to the improvement in M1 growth rate (0.7 percentage points) reaches half. The decrease in deposit growth rate should also be taken seriously, while the growth rate of financing still needs to be increased. In order to sustain the short-term improvement in money supply, fiscal expansion is still the most important factor.Expansion is still the most important factor.Since the end of September, a series of policies have had the expected guiding effect. Both the stock market and the real estate market have seen a significant increase in trading volume, and societal risk preference has improved significantly, leading to a rebound in monetary supply. However, it is important to note that the growth rate of social financing is still declining, with the growth rate of non-government sectors at a low level and showing no signs of a turnaround, and credit growth is also continuing to decline. In October, new social financing increased by 1.40 trillion yuan, with the outstanding balance growth rate falling to 7.8% year-on-year, the financing growth rate of non-government sectors at 6.2%, remaining basically stable from the previous month, and the year-on-year growth rate of renminbi loans slightly decreasing. According to calculations, the speed of debt expansion for private entities is still declining, dragging down M2 growth. Without continuous expansion on the asset side, solely relying on adjusting deposit structures will be difficult to truly improve liquidity supply in society. The press conference on November 8th mentioned that a more aggressive fiscal policy will be implemented by 2025, including actively using available deficit space, expanding the scale of special bond issuance, and continuing to issue special national bonds. If fiscal policy can achieve a significant increase in financing, the improvement in monetary supply will be more sustainable, and the improvement in economic CKH HOLDINGS203 inflation will also be more sustainable.