Core Viewpoint - The People's Bank of China (PBOC) released the "Monetary Policy Implementation Report for the Third Quarter of 2025," highlighting the relationship between base money and broader money supply, emphasizing that base money is the source of money creation and affects the banking system's asset-liability activities [1] Group 1: Base Money and Broad Money - Base money, also known as "high-powered money," is a liability of the central bank and includes cash in circulation, required reserves, and excess reserves held by commercial banks [1] - As of the end of Q3 2025, China's base money balance reached 38.6 trillion yuan, while the broad money supply (M2) exceeded 335 trillion yuan [1] Group 2: Money Creation Process - The money creation process involves the central bank, commercial banks, and the real economy, where commercial banks derive deposits through asset expansion, forming broad money [2] - The ability of commercial banks to create money is fundamentally influenced by the effective financing demand from the real economy [2] Group 3: Diversification of Financing Channels - The traditional reliance on bank loans for money creation is evolving, with commercial banks increasingly engaging in direct financing through bond purchases, which also generates deposits [3] - The proportion of bank loans in total bank assets remains around 60%, while the share of bonds has increased from approximately 20% at the end of 2019 to about 25% currently [4] Group 4: Structural Changes in Financing - The rapid development of direct financing and changes in the financing structure are leading to a more diversified money creation channel for banks [4] - The PBOC is innovating its base money injection methods and utilizing structural monetary policy tools to guide financial institutions in optimizing credit allocation [4] Group 5: Future Monetary Policy Directions - The development of the financial market and changes in financing structure will have profound impacts on the total money supply and financial regulation [5] - There is a need to continue transforming the monetary policy framework to emphasize price-based regulation and deepen interest rate marketization reforms [5]

Core Viewpoints - The static forecast indicates that the old-caliber M1 is expected to decline from 6.2% in September to around 3.4% by the end of the year, while M2 is projected to decrease from 8.4% in September to approximately 8.0% by year-end, both remaining higher than the end of 2024 [2] - The analysis framework for M1 and M2 growth involves understanding the components of M1 as part of M2, with M1 being derived from M2 minus other currencies [7][17] Group 1: M2 Growth Factors - M2 growth is influenced by five main factors: corporate leverage, household leverage, foreign exchange derivation, government leverage, and other factors [8][20] - The forecast for M2 growth indicates a decline of 900 billion, with M2 expected to decrease to around 8.0% by year-end due to factors such as reduced government leverage and a decline in corporate loans [8][22][28] Group 2: M1 Growth Analysis - The old-caliber M1 is expected to decline by 1.6 trillion year-on-year, with a forecasted drop to 3.4% by year-end, influenced by factors such as a decrease in household deposits and a stable level of non-bank deposits [9][10][52] - The analysis of other currencies shows that household deposits are expected to decrease by 620 billion, while non-bank deposits are projected to increase by 1.9 trillion [46][47] Group 3: Impacts on Capital Markets - Changes in M1 are seen as leading indicators for price improvements, with M1 growth typically preceding changes in PPI and industrial product inventory by three to four quarters [54] - Non-bank deposits are closely linked to trading volumes in the financial market, with higher non-bank deposits correlating with increased trading activity [55] - The relationship between corporate and household deposits can predict corporate profits and ten-year treasury yields approximately one year in advance [57] Group 4: Potential Scenarios for M1 Changes - Several scenarios for potential M1 changes in Q4 are proposed, including increased corporate loans and infrastructure investment, which could lead to upward pressure on M1 and M2 [63] - Another scenario suggests that a decrease in M2 and household deposits, alongside an increase in corporate deposits, could indicate improved economic cycles and profitability [64]

Core Viewpoint - The article discusses the significant improvement in M1 and M2 monetary aggregates in China, attributing this to the return of cross-border funds rather than traditional economic factors [3][10][39]. Group 1: Economic Context - M1 and M2 have maintained a high growth rate, with the M2-M1 spread continuing to narrow [3]. - Many institutions struggle to understand the substantial improvement in M1 and M2 due to their traditional economic perspectives [6][8][9]. Group 2: Cross-Border Fund Flows - China is characterized as an open economy, allowing for significant cross-border capital flows, which can lead to misunderstandings about domestic monetary conditions [11][12]. - The article explains that when interest rates are lowered in China while they are raised in the U.S., it can lead to capital outflows, impacting M1 and M2 negatively [16][19]. Group 3: Impact of Interest Rate Changes - The movement of deposits between banks in China and the U.S. is illustrated, showing how a decrease in Chinese interest rates can lead to a contraction in domestic bank balance sheets [21][23]. - The article emphasizes that the recent return of funds to China is linked to uncertainties created by U.S. policies and expectations of U.S. interest rate cuts [35][36]. Group 4: Market Reactions - The return of funds is expected to positively impact the A-share and Hong Kong markets, which have been under pressure due to real estate risks [52][54]. - The article suggests that the current market dynamics indicate that the return of capital will continue, potentially leading to significant market recoveries [55][58]. Group 5: Inflation and Economic Indicators - The article notes that the core CPI is gradually rising, indicating a potential shift in inflation dynamics as capital returns to China [61][64]. - Traditional financial data may not accurately reflect the current economic conditions due to the unique nature of the capital flows [66].

Credit Growth - The total social financing (社融) stock growth rate rebounded to 8.9%, with new social financing of 4.2 trillion yuan in June, an increase of 900.8 billion yuan year-on-year[1] - New short-term loans for enterprises reached 1.16 trillion yuan, a year-on-year increase of 490 billion yuan, marking the highest level this year[2] - New medium- and long-term loans for enterprises amounted to 1.01 trillion yuan, up 40 billion yuan year-on-year, also a relative high for the year[2] Household Credit - New short-term loans for households were 262.1 billion yuan, an increase of 15 billion yuan year-on-year, driven by online consumption growth during the "618" shopping festival[3] - New medium- and long-term loans for households reached 335.3 billion yuan, up 15.1 billion yuan year-on-year, indicating a continued moderate recovery[3] Monetary Indicators - M1 growth rate increased by 2.3 percentage points to 4.6% month-on-month, supported by a low base from the previous year[4] - M2 growth rate rose by 0.4 percentage points to 8.3%, ending a previous downward trend, driven by credit recovery and seasonal effects[4] Structural Changes - The structure of social financing is shifting from "government bond support" to "real economy expansion," indicating a phase of credit improvement[1] - However, the current credit recovery is primarily driven by policy and technical factors rather than endogenous demand expansion, with ongoing weak industrial profits and manufacturing orders limiting sustainable credit growth[6]