By Song Hongmei (Chinadaily.com.cn)
Updated: 2007-07-13 16:41

He said Taiwan and Japan did not see the M2 index, a broad measure of money supply, grow significantly. Instead it declined when their loan growth pushed stock indexes up.

In spite of loan growth between January and May, the growth rate of the M2 index edged down to 16.74 percent in May from 17.1 percent in April and 17.27 percent in March, a little higher than the target growth of 16 percent set by the central bank at the beginning of this year. During the same period, China's benchmark CSI 300 Index has surged 86 percent this year.

He concluded in his report that the M2 therefore may no longer be an appropriate parameter to assess the extent of China's monetary expansion and to forecast demand.

His viewpoint is echoed by Liang Hong, chief China economist with Goldman Sachs Asia, and Song Guoqing, a professor with Beijing University, who also believe that M2 growth has understated the speed of monetary expansion.

They believe that the growth rate of the M3 index, which includes the M2, deposits in non-bank financial institutions, and securities issued by financial institutions, has been faster than that of the M2 since the second quarter of 2006, likely reflecting the fast accumulation of capital market-related financial assets. The M3 rose 19.2 percent year-on-year in April. They suggested that China take decisive measures to rein in excessive demand and control inflation pressures, given the current monetary expansion and rapid growth in capital markets.

China is due to release its consumer price index next week but generally economists have forecasted that inflation from a year earlier has exceeded 4 percent due to the food price spike, much higher than the government's warning level of 3 percent.

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