A potential risk with huge M2 supply

China's broad money supply, or M2, has broke through the 103.6 trillion yuan ($ 16.87trillion) mark at the end of March, and whether this will trigger another bout of inflation has become a hot topic.

Some media outlets believe that we should not worry as China has a strong monetary control policy. However, in fact, we should not be so blindly optimistic as there's always the possibility of inflation risks, says an article in Beijing News. Excerpts:

Compared to other emerging economies, like India and Brazil, China has larger amounts of M2, but its current CPI is relatively lower.

However, those figures don't mean that China should not be cautious about inflation. If the household savings rate keeps declining, even if the amount of M2 stays stable, fixed deposits will flow into market, leading to a rapid increase in M0 and M1, which can also push up prices in China.

To be more specific, the downward trend in the household savings rate is quite obvious and seems irreversible. The rate declined from 62 percent in 2000 to 52 percent in 2012. If the rate decreases to less than 40 percent within the next five years, there will be nearly 5 trillion yuan flowing into the market.

Moreover, China should not rely too much on its monetary control policy to curb potential inflation. For one thing, the implementation costs are too high as the central bank of China needs to pay interests for its actions no matter if it's raising the deposit reserve ratio or trading the central bank bills. Also, using the control policy too frequently can cause side effects, like increasing the scale of shadow banking. For instance, trust loans already increased 1 trillion yuan in last year.

Since authorities still cannot figure out the exact amount of a reasonable and safe additional issue, we should be prepared for potential inflation risks, rather than easily putting down our guards now.