M2 growth underestimates inflation pressure: Goldman Sachs

Updated: 2007-07-08 10:44
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China needs "decisive" measures to rein in excessive demand and control inflation pressures as its M2 growth has understated the speed of monetary expansion, according to the latest report by Goldman Sachs, the US investment bank.

Growth rate of M2, a broad measure of money supply, edged down to 17.1 percent in April 2007, while M3, which includes M2, deposits in non-bank financial institutions and securities issued by financial institutions, picked up to 19.2 percentyear-on-year.

"The M3 growth rate has been faster than that of M2 since the second quarter of 2006, likely reflecting the fast accumulation of capital-market-related financial assets," said Liang Hong, chief China economist with Goldman Sachs Asia.

Figures from the bank show that bonds issued to non-financial institutions grew 30 percent year-on-year in April and non-M2 deposits by other financial institutions soared 63 percent over the same period of last year.

In the past, M2 and M3 are used to maintain similar growth speeds due to relatively small changes in non-M2 liabilities in the country, said Liang, who believed a broader money supply measure like M3 would be a more useful parameter to assess the extent of monetary expansion and to forecast the demand, given the rapid growth in capital markets.

Since the M3 growth has been hovering over 19 percent year-on-year in recent months, she expected the economy would continue to speed up and inflation might intensify in the near term.

The Goldman Sachs predicted theconsumer price index(CPI), a major inflation gauge, would be at 3.6 percent in 2007 and an average of more than four percent in the rest of the year. The bank expected CPI inflation to ease to 2.6 percent in 2008.

The China Securities Journal, citing a report from the central bank's research bureau, reported the CPI was expected to rise 3.2 percent for the whole of 2007, with its peak of 3.5 percent in the third quarter.

Food prices have climbed in China this year, pushing the country's CPI to 3.4 percent in May, higher than the government's warning level of three percent.