China's broad money and credit growth in November was mainly in line with expectations and suggests that monetary conditions remain relatively tight.

The country's M2 growth slowed to 12.7 percent year-on-year in November from 12.9 percent in October, compared with the market consensus of 12.8 percent, according to latest official data released on Wednesday.

New loans came in at 562 billion yuan in November, lower than the 587 billion yuan in October and the 564 billion yuan a year ago. I believe the People's Bank of China (PBoC) will ensure reasonable money and credit growth under its "prudent" monetary stance for 2012 ("neutral" by my interpretation versus "tight" in most of 2011) to support around 8 percent economic growth in 2012.

Capital outflows and downside risks to economic growth suggest that more cuts in the required reserve ratio (RRR) are to be expected to ensure sufficient liquidity. I forecast M2 growth will be about 14 percent next year, versus 12-13 percent in 2011, with CPI forecast at 3.2 percent for next year against 5.4 percent this year. New loans are expected at 7.5-8.0 trillion yuan. This assumes stable capital flows and a reasonable level of total social financing.

November saw a modest month-on-month rebound in new deposits, which increased by 325 billion yuan, compared with a decline of 201 billion yuan in October and an increase of 592 billion yuan a year ago. Household deposits rose by 210 billion yuan after a decline of 727 billion yuan in the previous month, possibly reflecting personal deposits flowing back the banking system as the China Banking Regulatory Commission (CBRC) tightened the rules on wealth management product issuance and off-balance sheet activities. Deposits by non-financial institutions also rose by 373 billion yuan versus an increase of 86 billion yuan in October and a decline of 305 billion yuan in September.

As we have discussed before, M2 growth is underestimated due to the reallocation of deposits into off-balance-sheet wealth management products that are not counted as deposits.

Fundamentally, a change in M2 was mainly attributable to new loans and increases in the PBoC's forex purchases. The lower November M2 growth likely reflects modest new loans as well as possible capital outflows, as seen in the decline in the PBoC's forex purchases in October.

Loan data show that new household loans increased by 143.5 billion yuan versus 130.7 billion yuan in October, while loans for non-financial institutions fell to 418.3 billion yuan from 454.8 billion yuan in October. Year-to-date, new loans total 6.83 trillion yuan, down 8.4 percent from a year ago, and are on track to hit 7.4-7.5 trillion yuan for the full-year.

While loans from large banks were constrained by quota restrictions for most of 2011, lending by smaller banks has been constrained by loan/deposit ratio regulations. I expect the CBRC to be more flexible in implementing prudent macro-economic measures in 2012 so as to ensure sufficient credit expansion.

The author is vice-president and China economist at Barclays Capital Asia. The opinions expressed here are entirely her own.

(HK Edition 12/15/2011 page2)