Rapid growth in narrower measures of China’s money supply (M1) has generated significant attention from the markets as a potential sign that liquidity conditions are improving, particularly for corporates, and that monetary easing is gaining traction. The reality is that most of the increase is the byproduct of a base effect resulting from shifts in deposits during the equity market bubble and subsequent bailout in the summer of 2015. As a result, M1 growth should decelerate sharply starting in August. Credit demand remains under pressure, and the efficiency of new credit in powering activity within the real economy is still declining.
