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key points:

in august, the gap between broad money and narrow money continued to widen, and the differences between market players and the central bank's monetary policy continued to widen. household and corporate financing continued to shrink, and social financing relied entirely on public sector bond financing. the tool of lowering interest rates is completely ineffective in our country, which means that we must find effective tools to promote economic recovery outside of monetary policy.

on august 21, the central bank cut interest rates for the seventh time since december 2021, risking a shock to the exchange rate, before the fed cut interest rates. the one-year loan market benchmark rate (lpr) was lowered from 3.45% to 3.35%, and the five-year lpr was lowered from 3.95% to 3.85%. although the financial data in august was lower than expected, many people expected that the central bank would reverse the situation in september after another interest rate cut. what is the actual situation?

the gap between broad money and narrow money continued to widen, and the differences between market players and the central bank's monetary policy continued to widen.

at the end of august, our broad money (m2) balance reached 305.05 trillion yuan, a year-on-year increase of 6.3%; the banknotes and coins held by the public, and the deposit reserves of commercial banks at the central bank, that is, the balance of currency in circulation (m0) was 11.95 trillion yuan, a year-on-year increase of 12.2%.

m0 grew by 12.2%, indicating that the central bank actively injected cash into the market and increased the base money to create conditions for monetary expansion. m2 grew by 6.3%, which means that the central bank continued to implement monetary easing policies. the money multiplier has been above 8 since february, and exceeded 8.3 in july and august. the decline in interest rates, the growth of base money, and the expansion of the money multiplier are the basic characteristics of the central bank's monetary easing policy.

however, the balance of narrow money (m1), which has stronger liquidity in the monetary structure, shrank from 63.23 trillion yuan in july to 63.02 trillion yuan, a month-on-month decrease of 0.3% and a year-on-year decrease of 7.3%. this is the fifth month of contraction of m1 since april.

m2 continued to grow but m1 continued to shrink, resulting in the gap between broad money m2 and narrow money m1 continuing to widen to 13.6%, which not only reached the highest value so far this year, but also was at least the maximum value recorded in the saburo database since 2000.

the smaller the gap between m2 and m1, the greater the proportion of m1 with stronger liquidity in m2, the stronger the expectations of households and enterprises for economic growth, and the more positive the attitudes of household consumption and corporate investment. on the contrary, it means that the proportion of m1 in m2 is shrinking, and more funds are transferred from consumption and investment to long-term deposits or financial management channels, indicating that enterprises and residents have poor expectations for their own income and overall economic growth, and economic vitality is seriously weakened.

the m2-m1 spread could be adjusted by the central bank through monetary policy before 2017. for example, during the 2008 financial crisis, the m2-m1 spread suddenly rose from -4.4 to 8.7. after the central bank cut interest rates and reserve requirements, it fell back to -4.8% the following year.

the domestic economy began to decline in 2014, and the m2-m1 spread rebounded to 7.8 that year. in 2015, the central bank cut interest rates five times within a year, quickly reducing the m2-m1 spread back to -1.9, and continued to fall to -10.1 in 2016.

since then, it has expanded rapidly again since 2018. in 2020, the global manufacturing industry was briefly shut down due to the epidemic, and external orders returned in a concentrated manner, which eased the gap and dropped to 1.5.

since then, the spread has continued to rise. even though the central bank started a monetary easing cycle of interest rate cuts and reserve requirement ratio cuts at the end of 2021, it failed to affect the trend of the m2-m1 spread continuing to expand. this shows that the central bank's monetary policy has begun to fail since the epidemic, and the differences between market entities and the central bank's monetary policy continue to widen.

household and corporate financing continues to shrink, and social financing depends entirely on public sector bond financing.

m2 continued to increase in august, which means that social financing is still increasing. at the end of august, the stock of social financing scale was 398.56 trillion yuan, an increase of 8.1% year-on-year. however, the increase in social financing in august was only 303.11 billion yuan, a decrease of 3% year-on-year. from january to august, the cumulative increase in social financing scale was 21.9 trillion yuan, a decrease of 3.32 trillion yuan or 13.1% from the same period last year.

the year-on-year decrease in the scale of social financing is due to the serious weakening of the financing willingness of households and non-financial corporate sectors. social financing mainly relies on public sector bond financing.

in august, the net financing of public sector bonds was 1617.7 billion yuan, a sharp increase of 37.6% year-on-year, accounting for more than half of the new social financing in that month - 53.4%. from january to august, the net financing of public sector bonds was 5.64 trillion yuan, a year-on-year increase of 13.6%.

contrary to the central bank's good wishes of cutting interest rates and hoping that market entities such as enterprises and households will increase financing to expand investment, production and consumption, as the central bank cuts interest rates, enterprises and households have chosen to continue shrinking their balance sheets and reduce debt risks by reducing debt amid weaker economic expectations.

in august, the corporate sector added 1,083.1 billion yuan in new social financing, down 22.8% year-on-year. from january to august, the corporate sector added 13.79 trillion yuan in new social financing, down 15% year-on-year.

among them, new loans to the corporate sector in august were 847.9 billion yuan, a year-on-year decrease of 28.9%; from january to august, new loans were 11.99 trillion yuan, a year-on-year decrease of 14.3%.

since the corporate sector in our central bank's financial statements actually refers to enterprises and institutions, including central and local state-owned enterprises such as china railway corporation, china construction corporation, and the three oil companies, as well as public institutions such as education and medical care, the consequences of repairing the balance sheets of private enterprises that can independently judge market expectations and make independent credit decisions are weakened by the actions of state-owned units to increase credit.

therefore, the divergence between the pure market-oriented household sector and the central bank's monetary policy is even more obvious. in august, the household sector's new loans amounted to 196.3 billion yuan, a year-on-year decrease of half. from january to august, new loans amounted to 1.43 trillion yuan, a year-on-year decrease of 52.2%.

what is very embarrassing for the central bank's monetary policy now is that it has to print money, because it has to maintain the public sector debt, the extension of the public sector's implicit debt and the repayment of old debt with new debt. the public sector issues bonds for the purpose of investing in public projects, so why does saburo say that it is for the purpose of extension and repayment of old debt?

first, interest expenditures in the first half of the year were 630.4 billion yuan, up 6.5% year-on-year, accounting for 18.9% of the 333.79 billion yuan of new bond financing by the public sector in the first half of the year. that is, nearly one-fifth of the new bonds were used to pay interest on existing bonds.

second, the public sector's outstanding debt was 73.13 trillion yuan by the end of june. even if calculated on an average 10-year basis, 7.3 trillion yuan of principal must be repaid each year, or 3.65 trillion yuan in half a year. however, the 3.34 trillion yuan of new bonds minus the interest in the first half of this year left 2.71 trillion yuan, which is not enough to repay the principal. it is reasonable to speculate that part of it has been extended.

therefore, after the huge differences between the corporate and household sectors and the central bank's monetary policy, it seems that the public sector is playing a solo role in continuing financing to support the central bank. in fact, the proportion of its new financing used to promote economic recovery is also limited.

therefore, it is useless to continue printing money. because most of the newly printed money flows to the public sector, and some flows to state-owned enterprises and institutions. after they pay the interest on the existing debts and the principal due, any surplus will become deposits and fixed-income treasury bonds, which are completely used for "idle capital". it is difficult to boost domestic demand and promote economic growth.

the tool of lowering interest rates is completely ineffective here, which means we must look for effective tools outside of monetary policy to promote economic recovery.

we found that since the people's bank of china first launched this round of reserve requirement ratio cuts, interest rate cuts and monetary easing policies in december 2021, the interest rate cuts have failed to resonate with market players, and the wishes of households and corporate sectors are contrary to the central bank's monetary policy goals. therefore, the role of interest rate cuts in promoting economic growth is limited.

in the past three years, the central bank's five-year lpr rate has dropped from 4.65% at the end of 2021 to 3.85% in august 2024.

however, the year-on-year growth rate of new social financing declined from 43.1% at the end of 2021 to a decline of 3% in august 2024; new loans to the household sector declined from an increase of 12.8% to a decline of 50%; new financing of non-financial enterprises declined from an increase of 30.3% to a decline of 22.8%; fixed asset investment declined from an increase of 4.9% to an increase of 2%; social retail sales declined from an increase of 10.7% to an increase of 2.1%; commercial housing sales declined from an increase of 4.8% to a decline of 23.6%; the gdp price reduction coefficient simulated by the qiniu research institute through cpi, ppi and housing prices declined from an increase of 3.4% to a decrease of 0.8%; the urban surveyed unemployment rate increased from 5.1% to 5.3%.

it can be seen that interest rate cuts are just one tool in the arsenal of macroeconomic regulation and control, and may not always be effective. when the underlying logic of economic development seriously conflicts with the upper economic structure, the economic structure needs to be adjusted in a timely manner according to the new economic situation.

we must realize that the marginal contribution of debt, monetary easing, and fixed investment to economic growth has become smaller and smaller. the reason is that debt, monetary easing, and fixed investment are all stimulus measures to increase supply, and the dilemma we are facing now is that there is oversupply but severe lack of demand. the reason for the lack of demand is not that consumers have money but do not consume, but that they have no money to consume. their income accounts for too low a proportion of the national income distribution, which is generally one-third lower than the international average.

we must take appropriate stimulus measures to address the problems of insufficient consumption and overcapacity. obviously, this is beyond the capacity of monetary policy. we need to change the national income distribution system and social security system to improve the income and security of workers. there is no shortcut or alternative path.

【author: xu sanlang】