China central-bank chief warns on money supply
7 March 2013, Beijing (MarketWatch)

The high ratio of money supply to gross domestic product in China means risks are excessively concentrated in the banking sector, according to a top official.

This demonstrates the need for financial reform, People's Bank of China Gov. Zhou Xiaochuan was quoted as saying in the China Business News on Friday.

The comparatively high level of M2 is the result of China's high savings rate, Mr. Zhou said in an interview with the newspaper.

Other East Asian countries with high savings rates also have high ratios of M2 to GDP, he said in the report.

M2 is China's broadest measure of money supply and includes various kinds of bank deposits.

But at the same time the M2 level shows that China remains reliant on "indirect finance"--bank lending as opposed to forms of "direct finance" such as equity and bond issuance, Mr. Zhou said in the report.

China's ratio of M2 to GDP rose to 188% of GDP last year--up from 154% in 2002, according to the report.

Improvements to China's securities and insurance markets should help lower the ratio over the medium to long term, Mr. Zhou said in the report.

At the opening of the National People's Congress in Beijing Chinese Premier Wen Jiabao set a target of 13% M2 growth this year--down from last year's 14% target.

China's M2 growth is typically slightly higher than nominal GDP growth to accommodate the "monetization" of certain parts of the economy as economic reform progresses, Mr. Zhou was quoted in the report.

Under the old planned-economy system many goods such as land and property were distributed by the state without money changing hands, he said.

China's target this year is for a 3.5% rise in consumer-price inflation and a 7.5% rise in real, inflation-adjusted GDP meaning a nominal GDP increase of around 11%.

China's stimulus policies following the world-wide financial crisis in 2008 were appropriate under the circumstances, Mr. Zhou said.

In retrospect stimulus could have been exited earlier, he said in the report.

But in 2010 there were various world-wide risks that made the economic outlook highly uncertain--including euro-zone debt and fiscal worries in the U.S., Mr. Zhou was quoted as saying.
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Newspaper website: yicai.com