Do you feel overwhelmed by all the financial data that was just mentioned? Today I will help you understand these indicators.
Social Financing Scale
First, let’s take a look at the social financing scale, or social finance (social finance). Social financing scale refers to the funds obtained by the real economy from the financial system. The real economy here includes not only enterprises but also individuals. This indicator was not only included in the central bank report, but also written into the government work report in 2016. Its importance is self-evident, and it can be said that it comprehensively reflects the total relationship between financial support for the real economy and the financial system.
Therefore, observing the increment of social financing and whether it is in line with expectations can indicate the financing needs of the real economy in our country.
Source: Wall Street View
Social financing data includes several major components such as new RMB loans, foreign currency loans, and government bonds, with new RMB loans being the largest core component. Therefore, it is also an important statistic every month.
Money Family – The Three Brothers
Next, let’s talk about the three brothers of the money family: M0, M1, and M2.
M stands for Money, and the following numbers represent the level. As the numbers increase, the levels also increase. They all reflect the indicators of the money supply.
M0 is cash in circulation, which is the sum of cash held outside the banking system by various units and cash held by residents. It can be simply understood as the money we can see, which is closely related to consumption and is the most active and liquid money;
M1 is based on M0 and adds corporate demand deposits. Generally, corporate demand deposits are used for production in a timely manner and have high liquidity.
Looking at M2, it adds corporate time deposits, household savings deposits, and other deposits on the basis of M1. Usually, the money supply referred to is M2.
Note: Image source network
Just now we mentioned that M0 is the most active money, and the higher the value, the more affluent people are likely to be;
M1 represents the real purchasing power of everyone, reflecting changes in the tightness of funds for residents and businesses. The higher the growth rate, the more active the business operations and financing activities, and more money flows into consumption and business expansion. It is an indicator of leading economic cycle fluctuations;
Whereas M2, based on M1, adds household savings and corporate time deposits. It reflects both real and potential purchasing power and better reflects changes in total social demand and the pressure of future inflation.
M1-M2 Scissor Difference
Along with these data, we will also see an indicator. The M1M2 scissor difference refers to the difference in the growth rates of M1 and M2. What does this indicator mean?
We just mentioned that M1 is cash in circulation + corporate demand deposits, and it is active funds, while M2 is M1 + household savings deposits and corporate time deposits.
If M1’s growth rate equals M2’s growth rate, it means that the growth in corporate demand deposits and time deposits is synchronous. With active supply and demand, corporate re-investment intentions are high, and economic development is vigorous.
If M1’s growth rate is higher than M2’s growth rate, that is, M1-M2 is a positive scissor difference, it means that the growth rate of corporate demand deposits is higher than that of time deposits, and people and businesses are willing to circulate money, and more money flows into the real economy, increasing the economic activity. At this time, businesses are also willing to finance at higher costs, and returns on assets other than savings deposits are higher. People will withdraw savings deposits for investment or purchase of stocks, and a large amount of funds will be available for immediate payment. With more funds in the market, there will generally be pressure on prices to rise in both goods and labor markets.
If M1’s growth rate is less than M2’s growth rate, that is, M1-M2 is a negative scissor difference, it indicates a pessimistic market. Businesses and residents choose to keep funds in banks in the form of time deposits, indicating weak economic vitality and unwillingness to put money into the real cycle.
M1-M2’s negative scissor difference often indicates an overheated investment market and weak demand, with a certain risk of economic downturn.
In summary, these indicators can directly reflect businesses’ expectations for the future economy and can serve as leading indicators of credit and the economy. I have compiled the recent trends of M1, M2, and M1-M2 scissor differences over the years and have placed them in the text version. You can check them out if you are interested.
Data Source: Wind, Data Range: 2019.01-2021.03
Outlook
Although the growth rates of social financing, M0, M1, M2, and other data in March were lower than expected, major institutions such as CICC, CMB Securities, and CEBM are generally optimistic.
Analysts at CMB Securities believe that although the scale of social financing is lower than that of the same period of the previous year, it is generally not low.
Generally speaking, the March financial data basically met expectations, and there is no need for short-term adjustments in monetary policy. However, in the second half of the year, with changes in the economic situation, it is not ruled out that there will be further adjustments to monetary policy.
The opinions in this article are for reference only and do not constitute investment advice.
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