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China's money supply maintained robust growth in June, a sign that economists say makes an interest rate hike highly likely.

 

M2, a broad measure of money supply that covers cash in circulation and all deposits, rose 18.43 percent year-on-year to 32.28 trillion yuan (US$4 trillion) by the end of June, according to figures released by the People's Bank of China on Friday.

 

The growth rate was 6.2 percentage points lower than the figure for May.

 

Outstanding local currency loans in all financial institutions stood at 21.53 trillion yuan (US$2.7 trillion) by the end of June, up 15.24 percent year-on-year and 7.3 percentage points lower compared with the previous month, the central bank said.

 

New local currency lending for June stood at 394.7 billion yuan (US$49.3 billion), compared to 209.4 billion yuan (US$26.2 billion) in May.

 

"The money supply growth and the credit growth, although both down slightly, are still robust, adding liquidity pressure in the market," said Tang Min, chief economist with the Asian Development Bank's Resident Mission in China.

 

"Such figures may prompt the central bank to tighten its monetary policy soon, of which the long-rumored interest rate hike is highly likely."

 

The central bank set a growth target for the M2 of 16 percent this year, which economists say the country now seems unlikely to meet.

 

Fuelled by a swelling trade surplus and the inflow of foreign direct investment, the country's foreign exchange reserve, already the world's largest, surged by almost one-third from a year earlier to US$ 941.1 billion by the end of June, the central bank said.

 

China's trade surplus rose to a record monthly high of US$14.5 billion in June, according to figures released by the Ministry of Commerce.

 

"The ballooning foreign exchange reserve is a major factor behind the dynamic growth of the money supply," said Li Yongsen, an economist with Renmin University of China.

 

"It is likely that the central bank may soon take measures to mop the excessive liquidity in the market as the high growth of forex reserves is unlikely to fall," Li said.

 

"The measures may include an interest rate rise or the issue of more central bank bills," the economist said.

 

In a bid to curb credit and investment growth, the central bank raised the one-year benchmark lending rate by 27 base points to 5.85 percent on April 27.

 

It raised the required reserve ratios of banks by half a percentage point to 8 percent last month, which took effect earlier this month.

 

The ratio is the proportion of deposits a bank is required to have with the central bank as a way of managing their lending capacity.

 

The M1, an indicator reflecting liquidity and covering cash in circulation and current account deposits, rose by 13.94 percent year-on-year to 11.23 trillion yuan (US$1.4 trillion) by the end of June, according the central bank.

 

Outstanding deposits both in local currency and foreign currency in all financial institutions stood at 33.13 trillion yuan (US$4.1 trillion), a year-on-year increase of 17.19 percent.

 

Outstanding local currency deposits surged by 18.36 percent to 31.85 trillion yuan (US$4 trillion) by the end of June, the central bank said.

 

The growth rate of local currency deposits in June was 12.7 percentage points lower compared with the previous month, a slowdown, economists say, that may be caused by more spending on consumption, and investment in the rebounding stock market.

 

(China Daily July 15, 2006)