China’s Money Supply Exceeds the Combined Money Supply of the US and EU
China’s ever-growing money supply has reached a staggering amount, surpassing the combined money supply of both the United States and the European Union. With concerns of falling into a liquidity trap, experts are warning of potential consequences for the Chinese economy.
According to official figures released by China, the country’s broad money supply, known as M2, reached 299.56 trillion yuan ($42.16 trillion) by the end of February. This figure is higher than the combined money supply of the US and EU. M2 is calculated by adding the total amount of currency in circulation, demand deposits, and time deposits.
What is even more astonishing is the rate at which China’s money supply has been growing. In 1956, China’s total money supply was a mere 17.5 billion yuan ($7.1 billion). It took 57 years until March 2013 to surpass 100 trillion yuan ($16 trillion). By January 2020, M2 had surpassed 200 trillion yuan ($29 trillion) in less than 7 years. It is expected that China’s M2 will reach 300 trillion yuan ($42.25 trillion) by the end of this month.
In comparison, the M2 in the United States at the end of January 2024 was $20.8 trillion, which is about half of China’s figure when converted to yuan. The M2 in the Eurozone at the end of January was €15.1 trillion, equivalent to $16.4 trillion or 118.4 trillion yuan. This means that in terms of broad money supply alone, there is enough Chinese yuan to be exchanged for all the US dollars and euros in the world.
The loose monetary policy adopted by China has raised concerns among experts. Professor Cheng-Ping Cheng from Taiwan’s National Yunlin University of Science and Technology warns that China could fall into a liquidity trap. This trap refers to a situation where increasing the money supply has limited impact on interest rates, and private investment and consumption remain stagnant. This makes it difficult to escape deflation in the short term.
Cheng explains that the Chinese Communist Party (CCP) has been pursuing expansionary fiscal and monetary policies to stimulate investment and private consumption. However, the effects of these policies have been limited so far. Despite increasing the money supply, China is currently in a deflationary state, with companies reluctant to invest and consumers unwilling to spend. As a result, the increased money supply is not being used to promote economic activity.
Another economist, Henry Wu Chia-lung, echoes these concerns. He states that governments usually loosen monetary policy to stimulate the economy when the real economy is not performing well. However, China’s increase in money supply has not achieved its goal of stimulating consumption and rescuing the economy. The country’s consumer price index fell by 0.8 percent year-on-year, indicating that the mass increase in money supply has not led to increased consumption.
Experts believe that China’s excess money supply is likely to remain in the financial sector rather than entering the real economy for circulation. The funds are used to repair the balance sheets of banks and financial institutions rather than being used for consumption and investment. This could lead to an outflow of funds and the depreciation of the Chinese yuan.
The fluctuations in the exchange rate between the Chinese yuan and the US dollar reflect the broader impact of the increased money supply on China’s economic stability. The onshore Chinese yuan to US dollar exchange rate fell below 7.2 on March 22, hitting its lowest level since November 2023.
With China’s money supply continuing to grow and concerns of falling into a liquidity trap looming, it remains to be seen how the Chinese government will address these challenges and navigate its economic future.
