Money supply and the economy
Money supply reflects the amount of money available in the economy. When money supply is increasing, it will typically increase the availability of loans, which individuals and businesses can borrow to make purchases. The higher the money supply growth, the higher the growth in available funds. On the contrary, if money supply growth slows, it can have a negative impact on economic growth. As most of marginal growth in oil imports is coming from China these days, which affects tanker rates, money supply is an important indicator to follow.
Money supply growth misses estimate
For the month of June, M1 (a measurement of money supply that’s very liquid) grew at a year-over-year pace of 9.1%, the lowest increase seen for this year. M2, which is less liquid than M1, grew at 14.0%, also the lowest pace. Economists were expecting an average increase of 10.5% for M1 and 15.1% for M2. The lower increase we saw in June was likely driven by the government’s intention to squeeze out shadow banking. Here’s an example of shadow banking follows. Say a state-owned company borrows money from the state-run bank at a cheap rate, then re-lends it out to another entity at a higher interest rate. Sometimes, the entity that borrowed money at a higher interest rate from the state-owned companies will re-lend it out at an even higher rate.
Shadow banking can be a problem if it grows too large. This is because an investment return of 20% or more is really hard to come by. When economic growth slows and profits are hurt, lenders will ask borrowers to return the money. But in several cases, borrowers are unlikely to be able to pay back the principal. Additionally, greed can drive lenders to lend more than they can afford, because shadow banking is unregulated. Several lenders could face liquidity issues when they realize they’ve not set aside enough cushion to pay for day-to-day operations or weather an economic slowdown.
Implication for China and shippers
While you may interpret June’s figure as negative for tanker companies such as Teekay Tankers Ltd. (TNK), Tsakos Energy Navigation Ltd. (TNP), Scorpio Tankers Inc. (STNG), Nordic American Tankers Ltd. (NAT), and Ship Finance International Ltd. (SFL), China’s economy has historically been able to grow when money supply growth fell (with 2008 being the exception). So investors may not want to rely solely on money supply as an indicator of economic expansion and recovery in China. On the other hand, you could use money supply as an early indicator of economic recovery, since economic recoveries often start with more money supplied by the central bank or government stimulus.
© 2013 Market Realist, Inc.
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