How China's Slowing Money Supply Could Impact Global Risk Assets

The recent announcement from China regarding its M2 money supply growth slowing to 8% in June has immediate implications for global risk assets, including cryptocurrencies. This represents a decline from 8.6% in May and is below the anticipated 8.5%, indicating a tightening of liquidity conditions.

China’s outstanding loan growth also signals a concerning trend, coming in at only 5.3%. This deceleration suggests that the economy is struggling to convert expansive monetary policy into tangible borrowing and investment activity, a reality that could impact global economic sentiment.

Understanding the Decline in Credit Demand

The drop of 0.6 percentage points in M2 growth is significant, especially given that a considerable monetary base of CNY 353.67 trillion is involved. Even minor shifts in percentage can translate into massive sums impacting the financial system. The relationship between money supply and economic activity is critical; a reduction in demand for loans hints at weakening consumer and business confidence.

This dynamic is particularly worrisome. When banks have the capacity to lend, but businesses and consumers hold back, it raises red flags about economic vitality. The ongoing stimulus measures by the People’s Bank of China seem unable to spur the desired increase in credit creation, which traditionally leads to economic growth.

The Global Ripple Effect

Historically, the liquidity conditions shaped by major economies like the US and China have correlated with the performance of risk assets. With China’s M2 growth rate decreasing, the global liquidity pool is somewhat diminished. This moderation does not directly crash crypto prices but removes a vital tailwind that supports market rallies.

For crypto investors, this development is noteworthy. As the credit demand figure remains low, it serves as an indicator of broader economic conditions that could lead to slower growth than anticipated. While Bitcoin and other cryptocurrencies have thrived in environments with expanding liquidity, the current trend suggests that the supportive conditions may be waning.

This material is informational and not financial advice.