China eyes 13 percent money supply growth to buffer economy in 2016: sources

BEIJING (Reuters) - China plans to target broad-based money supply growth of around 13 percent this year, sources said, a signal that further monetary policy easing is likely during a painful economic restructuring that could see millions of workers losing jobs.

Chinese 100 yuan banknotes and a U.S. one dollar banknote are seen in this picture illustration in Beijing, China, January 21, 2016. REUTERS/Jason Lee

Top leaders have already pledged “supply-side structural reforms” to tackle excess factory capacity and “zombie firms”, and are also expected to lean more on fiscal stimulus as they seek to avert a hard landing for the world’s second-largest economy.

“A 13 percent rise in M2 is sufficient for keeping liquidity flush in the near term, but we may see faster rises later this year as the central bank is likely to loosen policy further,” said one of the sources.

The target, which is set to be announced by Premier Li Keqiang at the annual parliament session that opens on Saturday, was endorsed by top party leaders at a closed-door Central Economic Work Conference in December, said a number of people with knowledge of the outcome of the meeting.

The sources also said the inflation forecast for this year was set to be around 3 percent, more than double the actual rate in 2015.

China’s top economic planner has said the government would target economic growth of 6.5-7 percent this year, confirming a Reuters report, and the sources said the money supply and inflation forecasts are in line with that target.

The State Council Information Office did not respond to faxed requests for comment. The money-supply targets are subject to last-minute revisions before being submitted to the largely rubber-stamp parliament for approval.


Flush credit conditions will be vital for the government to cut taxes and keep up infrastructure spending to compensate for the effects of tackling overcapacity, including unemployment.

There are plans to lay off 5-6 million workers from “zombie enterprises” over the next two to three years as part of efforts to cut industrial overcapacity and pollution, two sources with ties to the country’s leadership said this week.

The central bank resumed its easing cycle on Monday, cutting bank reserve requirements to pump the equivalent of around $100 billion into the banking system.

“The target for M2 is likely to be 13 percent this year. They need to keep appropriate liquidity conditions, credit and money supply growth to meet the need for supply-side reforms,” said another source, a policy adviser.

Advisers expect the central bank to deliver more cuts in bank reserve requirements in the coming months, though there is less room to cut interest rates. The central bank is also expected to pump out more cash via policy tools such as the standing lending facility (SLF) and the medium-term lending facility (MLF), they said.

M2 money supply expanded an annual 13.3 percent in 2015, beating the government’s money supply target of around 12 percent, due to a raft of easing measures.

China’s 13th Five-Year Plan, a blueprint covering 2016-20, will also be announced at the parliament meeting. President Xi Jinping has said China needs annual average growth of at least 6.5 percent over the next five years to hit a goal of doubling gross domestic product and per capita income by 2020 from 2010.

The government is expected to target consumer inflation of around 3 percent this year as it tries to combat deflationary risks and anticipates a possible rebound in global commodity prices, said the sources.

It aimed at the same target last year, but the consumer price index (CPI) stalled at just 1.4 percent.

“The target on the CPI will still be 3 percent, partly because the government hopes prices could rise,” said another source. “Many firms are losing money as producer prices drop.”

Data for January showed the CPI rose an annual 1.8 percent, while producer prices fell 5.3 percent, a 47th straight fall.

“Rapid falls in global commodity prices last year were unexpected, but we cannot rule out the possibility that commodity prices may rebound this year,” said an economist who advises the government.

China’s economy officially grew 6.9 percent in 2015, the weakest in 25 years, though some economists believe real growth is lower.

Reporting by Kevin Yao; Editing by John Mair and Will Waterman