China: Money Matters

Contrary to what the doomsters have been telling us, China’s economy is not on the verge of collapse. As the Wall Street Journal’s man in Beijing (and my former student), Aaron Back, reported: “China’s economic growth accelerated in the fourth quarter of 2012.” Indeed, China’s fourth quarter GDP growth rate came in at a strong 7.9%.

What the doomsters and many other Pekingolgists fail to grasp is that money matters. Indeed, it dominates fiscal policy, and nominal GDP growth is closely linked to growth in the money supply – broadly measured.

China’s most recent acceleration in GDP growth did not catch me flatfooted, because China’s money supply has been surging (see the accompanying chart).

In fact, China’s M2 money supply measure is 9.7% above the trend level. Money matters.