In a recent quarterly forum held by the Huaxia New Supply Economics Research Institute on January 20, 2024, former Deputy Director of the China Macroeconomic Research Institute, Ma Xiaohua, discussed the intricate relationship between money supply, the Consumer Price Index (CPI), and the Producer Price Index (PPI). His analysis was particularly relevant given that China has been undergoing a complex economic scenario where an increase in money supply has not aligned with rising price indices.

Ma's observations centered around a significant issue in the macroeconomic landscape: despite an increase in monetary supply, CPI and PPI have not experienced a uniform surgeThis situation begs the question why prices remain stable or even decline in the face of additional liquidity in the economyMa pointed out that the Central Economic Work Conference of 2024 has explicitly called for a moderately loose monetary policy

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He acknowledged that while a long-term increase in money supply is likely to lead to inflation, immediate structural issues necessitate targeted policies to combat low price conditions.

As of December 2024, the national PPI has been in negative territory for 27 consecutive months, and the GDP deflator has shown negativity for seven quartersThis phenomenon starkly contrasts with the trend in monetary supply, which has been on the rise during the same periodThe increase in M2, a measure of money supply, has outpaced the growth in both CPI and PPI, raising alarms among economists regarding the efficacy of monetary policy in stimulating demand.

Ma highlighted a critical finding from October 2023 to December 2024, noting that the growth rate of M2 vastly exceeded the increases in the three price indicesHe explained that this disparity is partly due to the inherent rigidity of prices

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In the short run, prices do not adjust immediately to changes in money supplyFor instance, simply increasing the money supply does not instantly translate to higher prices at restaurants or wages for workers; instead, it takes time for these adjustments to manifest across the economy.

However, such price rigidity does not fully account for the prolonged divergence between rising money supply and stagnant pricesTraditionally, the lagging effect of monetary policy on economic outcomes is about six monthsStill, the current economic environment proves unpredictable, and the anticipated timeline for economic reactions remains unclear.

Ma's analysis was structured around three main pointsFirstly, he argued that when demand is insufficient, an increase in money supply does not automatically lead to increased spending by businesses or consumersIn fact, data showed that M1, a narrow measure of money supply associated with cash and demand deposits, has shrunk, leading to lower market prices

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The April 2024 figure for M1 growth fell into negative territory, illustrating the struggle to stimulate spending.

Secondly, Ma pointed out that in both domestic and international markets suffering from an oversupply of goods, companies are powerless to raise pricesThe only option left is to reduce prices in order to clear inventoryThus, even an increase in the money supply fails to trigger an upward price movementIn such scenarios, continued investment could paradoxically amplify supply even further.

Finally, Ma stressed that when interest rates are already at rock-bottom levels, further reductions do little to spur economic activityHe explained that consumers and investors, anticipating further declines in rates, are more inclined to hold cash or savings rather than spendAny new money entering the system tends to be absorbed passively as idle capital without impacting overall demand or price levels.

"When capital returns diminish to very low levels, merely adjusting monetary policy struggles to effectively stimulate the economy," Ma stated, highlighting that increased liquidity often results in more funds being parked in banks rather than being utilized for consumption or investment.

In the face of these challenges, Ma believes that appropriate policy guidance can significantly alter the expectations of consumers and businesses, which could reverse the current economic stagnation

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With a shift in market sentiment, M1 could experience an acceleration in growth, causing a portion of M2's funds to transition into more active forms of moneyConsequently, the amount of money allocated per unit of goods would increase, subsequently pushing nominal prices up.

To facilitate this transformation, Ma has proposed a series of targeted structural policies aimed at converting M2 into M1, ensuring that M1 growth exceeds that of M2. His recommendations include reallocating public policy focus towards enhancing social employment and spurring consumer demandA portion of local special bonds and long-term treasury bonds could be designated to increase social security benefits for low-to-middle-income earners, ensure timely payment of civil servant salaries, uplift minimum wage standards, and extend assistance to low-income households through consumer vouchers.

Moreover, he suggested implementing favorable mortgage policies to stimulate residential purchasing, thereby alleviating pressures faced by real estate companies