China's M2 Growth Rebounds to 7.3% in December, Meeting Expectations

China's broad money supply (M2) growth rebounded to 7.3% in December 2024, matching market expectations, as the government's pro-growth policies and robust stock market performance boosted deposits. The People's Bank of China (PBOC) data released on Monday showed that M2 growth accelerated to a seven-month high, up from 6.8% in November, while M1 continued to contract, albeit at a slower pace.

The rebound in M2 growth suggests that the government's pro-growth policies and the robust stock market performance have started to revive market confidence. However, financing activity remains lukewarm, with aggregate social financing standing at 25.66 trillion yuan during the January-September period, down 3.68 trillion yuan compared with the same period of last year.

The PBOC has been implementing a combination of required reserve ratios, liquidity facilities, and credit rationing, in addition to interest rates, to achieve the intermediate target in money growth. This approach allows for a more generalized capture of unexpected changes in monetary supply during an extended sample period.



A study estimating the impact of unexpected money policy changes on the investment growth of Chinese public firms revealed that positive shocks increase investment growth, while negative ones do the opposite. In the baseline scenario, an increase (decrease) in quarterly investment growth by 7.1% follows a standard deviation increase (decrease) in money growth. This effect depends on the sign of shocks, with restrictive shocks having a more pronounced impact than expansionary ones. Additionally, the effect of money growth shocks became much more substantial after 2018.

The investment of private enterprises is more responsive to changes in monetary policy than state-owned enterprises (SOEs). Firms with more investment opportunities, higher growth rates, and more competition in the product market also exhibit more substantial responses to monetary policy changes. In general, more financially constrained firms show a stronger positive comovement with money growth shocks.

In conclusion, the rebound in China's M2 growth to 7.3% in December 2024, meeting market expectations, indicates that the government's pro-growth policies and the robust stock market performance have started to revive market confidence. However, financing activity remains lukewarm, and the impact on inflation and consumer prices is likely to be modest in the short term, given the continued real estate downturn and the lukewarm financing activity. The heterogeneity in firms' responses to monetary policy changes also suggests that the effect on consumer prices could vary across different sectors and regions.