Money supply grows at slowest pace for 7½ yearsPrivate sector credit; China manufacturing & services
Lending: Private sector credit (effectively outstanding loans) rose by 0.3 per cent in January after a 0.3 per cent rise in December. Annual credit growth held at a 3½-year low of 4.9 per cent.
Money: M3 and Broad Money grew by 4.3 per cent over the year – the slowest growth since 2010. The value of $100 notes in circulation is unchanged on a year ago – the slowest growth in 17 years of records.
China data: The National Bureau of Statistics manufacturing purchasing managers’ index fell from 51.3 in January to 50.3 in February (lowest since July 2016). The services sector purchasing managers’ index fell from 55.3 to 54.4. Any reading above 50 signifies expansion or growth of activity. 
What does it all mean?
The economy is by no means awash in cash. Private sector credit (or effectively the amount of outstanding loans) is growing, but at the slowest pace for 3½ years. And measures of the money supply like M3 and Broad Money are growing at the slowest pace in 7½ years. One definition of inflation is ‘too much money chasing too few goods’. Well, that doesn’t seem to be the case at present.
In January, business loans fell by 0.1 per cent and effectively they haven’t budged in two months. Similarly personal loans are still going backwards compared with a year ago. The only lending growth is by home loans. And the good news on that front is that lending to investors continues to slow.
The amount of currency in the economy is growing at a 3.3 per cent annual pace – well below the nominal growth of the economy, growing closer to 5 per cent. And Aussies are no longer squireling away $100 notes. The number of $100 notes in circulation hasn’t budged in a year, something that hasn’t happened in the 17 years of Reserve Bank records. This could be a positive trend as hoarding of $100 notes tends to happen in times of crisis.
What do the figures show?
Private sector credit
Private sector credit (effectively outstanding loans) rose by 0.3 per cent in January after a 0.3 per cent rise in December. Annual credit growth held at a 3½-year low of 4.9 per cent.
Housing credit grew by 0.5 per cent in January after gains of 0.4 per cent in November and December. Annual growth eased from 6.3 per cent to a 3½-year low 6.2 per cent.
Owner occupier housing credit rose by 0.6 per cent in January to stand 8.0 per cent higher over the year.
Investor housing finance lifted by 0.2 per cent in January with annual growth easing from 3.3 per cent to a 14-month low of 3.0 per cent.
Personal credit rose 0.1 per cent in January to be down 0.9 per cent over the year – just shy of the biggest annual decline in almost 5½ years (1.2 per cent fall in November).
Business credit fell by 0.1 per cent in January, although annual growth rose from a 7-month low of 3.2 per cent to 3.4 per cent.
Both M3 and Broad Money rose by 0.6 per cent in January. M3 and Broad Money are up 4.3 per cent on the year (7½-year low).
Term deposits with banks rose by $4.8 billion to a record high of $577.9 billion in January. Annual growth declined from 3.2 per cent to a 20-month low of 3.0 per cent.
Loans and advances by banks grew by 5.0 per cent in the year to January – matching the December result and the slowest growth in 4½ years. And loans and advances by non-bank financial intermediaries rose by 5.8 per cent in the year to January, up from the 5.6 per cent annual gain to December. 
China data
The National Bureau of Statistics manufacturing purchasing managers’ index fell from 51.3 in January to 50.3 in February (lowest since July 2016).
The services sector purchasing managers’ index fell from 55.3 to 54.4. Any reading above 50 signifies expansion or growth of activity.
What is the importance of the economic data?
Private sector credit figures are released by the Reserve Bank on the last working day of the month. Credit is separated into three categories – housing, other personal and business. Private sector credit is effectively the amount of loans outstanding in the economy. If growth in lending is strong then it suggests that credit from financial institutions is freely available, underlying demand for assets such as cars and houses is firm and that the price of credit (interest rates) is attractive.
China’s National Bureau of Statistics releases its ‘official’ monthly purchasing manager’s surveys for manufacturing and services at month-end. A reading above 50 indicates expansion. China is Australia’s largest trading partner and changes in the Chinese economy have major implications for the Aussie economy.
What are the implications for interest rates and investors?
The slowdown in credit and money growth suggest that inflation won’t be a problem for a while. Similarly wages are growing at a similar rate to prices, again suggesting modest inflation ahead. Only lofty energy prices provide inflationary potential together with a few other resources used in construction.
Chinese economic data bears watching. The easing in purchasing manager indexes could be related to the timing of the lunar New Year and the crackdown on pollution generators. Next week the National People’s Congress will endorse economic projections for the year.
CommSec expects rates to remain stable for some time.
Published by Craig James, Chief Economist, CommSec