The recent announcement from the People's Bank of China (PBoC) to revise the narrow monetary aggregate M1 by including various types of deposits marks a significant shift in how monetary policy is analyzed and understood in the country.

Starting from January 2025, the new calculation of M1 will encompass not only cash in circulation (M0) but also demand deposits from businesses, individual demand deposits, and reserve funds held by non-bank payment institutionsThis revision is expected to provide a more accurate reflection of the money supply in the economy.

Prior debates around including money market funds, which allow for instantaneous withdrawals and serve a payment function, in the M1 calculation have not resulted in their inclusion

This suggests a cautious approach by the central bank to avoid overstating liquidity, as certain financial products impose withdrawal limits that could distort real-time money supply metrics.

The latest adjustments have received much anticipated attention in market circlesThe PBoC has long been considering how best to align M1 with actual financial behaviors, particularly in light of evolving payment technologies and changing consumer preferences.

Practical challenges in categorizing management products

The anticipated changes came amidst broader market expectations, particularly following public statements from central bank officials about the necessity of including highly liquid financial instruments in the M1 definition to accurately reflect money supply

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In June, PBoC Governor Pan Gongsheng emphasized the importance of integrating personal demand deposits and financial products with payment capabilities into the M1 calculation.

However, skepticism remains regarding the inclusion of certain financial management productsAnalysts note that these products often have restrictions on instant withdrawals, which makes them less suitable for immediate money supply calculationsThe proposed revisions are seen more as theoretical adjustments rather than practical applications that would dramatically change the landscape of money supply accounting.

Leading economists have pointed out that many holdings of money market funds are managed by financial institutions who use these products primarily for asset allocation rather than for facilitating day-to-day economic transactions

Consequently, they argue that including these funds would not accurately represent M1's original intent as a measure of medium of exchange in the economy.

Citing liquidity discrepancies, experts suggest that the trend of various financial products needing time to process transactions – often referred to as 'T+N day settlements' – create challenges in their inclusion within the M1 category, as this delay contrasts sharply with the immediate liquidity required to meet economic demandsTherefore, while theoretically appealing, without practical operational frameworks, these products have been excluded from the revised M1 statistics.

The shift towards a more comprehensive M1

Analysis indicates that the revised M1 methodology aligns more closely with contemporary economic fundamentals

As the new metrics better mirror liquidity patterns and consumer behavior, it stands as a more relevant yardstick against which to measure and predict economic performance moving forward.

According to market analysts, the new M1 definition will likely show a substantial increase over previous estimates based on the earlier definitionsPreliminary estimates suggest that the adjusted M1 value may surge by approximately 42 trillion Yuan, translating to a nearly two-thirds increase in overall monetary measurements.

The driving forces behind the anticipated uptrends in the new M1 include improved real estate sales metrics, an overall better business sentiment that has released more available funds into circulation, and the diminishing impact of previous strategies aimed at curbing excess liquidity within the financial system

As analysts prepare their forecasts, they believe that trends observed in the new M1 will resonate across other financial measures, including inflationary trends as represented by the Producer Price Index (PPI).

In the broader economic narrative, the latest M1 revisions signify not only a recalibration of monetary policy tools but also a deeper understanding of how liquid assets influence consumer behavior and overall financial healthThe integration of residential deposits, which have been shown to significantly sway M1 metrics, is expected to foster a better correlation between M1 and actual economic activities.

To conclude, the updated M1 calculation provides stakeholders with much-needed clarity and perspective, offering a more accurate reflection of the economic landscape in light of shifting consumer demands and institutional responses