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Monday, November 12, 2012

Decline in China Money Supply and Loan Demand

Data released today (Monday) shows that Money Supply dipped in October in China, as shown on the graph below.

"Early in the economic cycle an increasing supply of money leads to additional spending and investment, and later in the cycle expanding money supply leads to inflation." Since it has been in an early cycle since the beginning of 2012, this latest dip may or may not be a warning of further weakness to come...one to consider monitoring over the next few months.


New Loans also fell for October, as shown on the graph below. "Consumers and businesses tend to seek credit when they are confident in their future financial position and feel comfortable spending money." This data is showing that loan demand has been on the decline since April of this year.


So, although there has been an expansion of money supply this year, loan demand has been declining. Unless loan demand picks up and is sustained, how can there be economic confidence and expansion in China?