Friday, November 07, 2003
My friend Matt Rudolph at Cornell sent me a report from Ma Jun at Deutsche Bank, which stated:
"Probably the PBOC has believed that the decline in money velocity is
now contributing more significantly to money demand
growth, and therefore 20% M2 growth would not seem
as threatening as just a few months ago."
Matt asked me: Do you think he mean diminished velocity reflects dampened money demand and therefore the M2 growth is less threatening?
My reply:
I think what Ma Jun said is reasonable. There is no immediate threat of inflation. This occurred in the mid-80s, whereby strong money growth was accompanied by pretty low inflation for a few years, but a sudden policy shock (price reform in 1988) could trigger heighten inflationary pressure. I suspect part of the reason that the PBOC is playing down the money growth issue is because they are under some political pressure to continue a relatively loose monetary environment. Of course, I would say that, wouldn’t I. I don’t think the PBOC’s stance would change, even if inflation was up to the 4% territory. Money velocity also might have declined because more and more bank loans are going toward long-term fixed asset loans, rather than short-term working capital loan. But the precise effect is yet unknown.
"Probably the PBOC has believed that the decline in money velocity is
now contributing more significantly to money demand
growth, and therefore 20% M2 growth would not seem
as threatening as just a few months ago."
Matt asked me: Do you think he mean diminished velocity reflects dampened money demand and therefore the M2 growth is less threatening?
My reply:
I think what Ma Jun said is reasonable. There is no immediate threat of inflation. This occurred in the mid-80s, whereby strong money growth was accompanied by pretty low inflation for a few years, but a sudden policy shock (price reform in 1988) could trigger heighten inflationary pressure. I suspect part of the reason that the PBOC is playing down the money growth issue is because they are under some political pressure to continue a relatively loose monetary environment. Of course, I would say that, wouldn’t I. I don’t think the PBOC’s stance would change, even if inflation was up to the 4% territory. Money velocity also might have declined because more and more bank loans are going toward long-term fixed asset loans, rather than short-term working capital loan. But the precise effect is yet unknown.
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