M2 measure might indicate and underestimation of China’s GDP

If calculated under the central bank’s target of 14 percent year-on-year growth rate of money supply, China’s M2 balance will break 97 trillion yuan by the end of this year. And the number is very much likely to approach or even exceed 100 trillion yuan by the end of the first quarter next year. This number was merely 47.52 trillion yuan by the end of 2008, realizing a “doubling” spending only four years.

Experts say that the major guideline when central bank determines annual money supply is: M2=GDP+CPI+X, thus adding a variable “X” upon nominal economic growth. The existence of variable “X” is mainly due to the monetization of properties (mainly lands).

Wu Xiaoling, former vice president pointed out that with the basic completion of monetization and development of direct financing in China, and along with the implementation of prudent monetary policies, the gap between M2 and the sum of GDP and CPI growth should decrease gradually.

The accumulation of “X” and CPI for over 20 years made the ratio M2/GDP reached 181 percent, compared to that of 86 percent of America.

A number of economic practitioners hold that China’s GDP and CPI are underestimated. “China’s M2/GDP ratio being higher than that of America reflects more of the undeveloped capital market of China, not excessive money issuance,” said Wang Qing, general manager of investment banking department of China International Capital Co. Ltd. ,“China’s M2 mainly reflects demand on deposits and financial wealth. If you add America’s stock market, bond market and money market together, the asset scale of those markets is much larger than that of China. China’s M2 is fundamentally all its financial assets.”

Experts also say that grey income should be taken into consideration. That part of funds exists in forms of cash and equivalents in most of the time.

The World Bank provides data on the % of national GDP for each countries M2 money supply Austria, Germany, Netherlands and several other european countries have high M2 levels.

There are estimates that China’s underground economy is 25% of the official GDP.

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