China's June Money Data - Three Observations

• M1 Growth Surprised, But Liquidity Preference is Still Stuck
• China's Banks Net Cash Inflow Is Recovering
• Quarter-end Social Financing is Nearly Double New Bank Loans

First, from a purely shocks & surprises point of view, the 4.7% yoy rise in M1 was a positive surprise, outstripping consensus expectations, even though its sequential rise of 3.2% was only 0.17SDs above historic patterns. Although M1 also rose faster during June than M2 (2.8% mom and 13.6% yoy), this does not mean that the historic fall in liquidity preference has been reversed: rather it conformed precisely to usual seasonal patterns. The best one can say is that the fall in liquidity preference did not accelerate in June, and may, possibly be stabilizing. If so, this lifts some depressing pressure off domestic demand.

Second, as expected, the surge in China's trade surplus during the second quarter is restoring the net positive cashflow which China's banks have been increasingly sorely missing. June's monetary data confirms this : bank loans rose by 920bn yuan during June (and by 16% yoy) whilst bank deposits rose by 2,860bn yuan (and by 12.3% yoy), resulting in a net deposit inflow for the month of 1,940bn yuan. Now there are pronounced seasonal patterns at work in China's banking system, but it is not that that's driving this cashflow, but rather a genuine rise in the private sector savings surplus.

This month the 3.3% mom rise in deposits was 0.64SDs above seasonal patterns, whilst the 1.6% mom rise in loans was 0.82 SDs below those patterns. In other words, the improvement in cashflow is greater than one would expect: and in fact it was

• 52% bigger than the cash inflow of June 2011, and
• sufficiently large to inflect the 12m trend.

China's banks are reliquifying even before we take into account the impact of lower reserve ratios.

Third: there's plenty of financing going on outside the banking system. Whilst new yuan bank lending amounted to 920bn yuan, total 'Social Financing' (which includes a wider set of financial instruments) came to 1,780bn yuan. We do not yet know the components of this figure, but back in March it was similarly swollen by a sharp quarter-end issuance of bankers acceptances which helped unfreeze emerging corporate 'triangular debt' problems. Probably the same thing happened again in June, and for the same purposes. Notice, however, that during these spikes, what's happening in the banking system (and the monetary aggregates) now tells only about half the story.