The Significance of the M1-M2 Spread

In the June social financing data released in mid-July, the growth rate of M1 has already reached a clear inflection point and is rising rapidly. If M1 growth continues to outpace M2 in the coming months, forming what is known as the “golden spread,” it will essentially confirm that the liquidity environment is improving. In recent years, those bearish on China have constantly harped on the “liquidity trap” and “deflation”—this data directly contradicts their claims.

Historically, when the M1-M2 spread turns positive and continues to narrow, the CSI 300 index has generally followed suit with an uptrend. However, we shouldn’t be overly optimistic about the M1 turnaround just yet, as it includes short-term factors related to concentrated foreign exchange settlements by export-oriented enterprises: With expectations of a weakening U.S. dollar running high recently, foreign trade firms have been rushing to convert their overseas earnings into RMB to hedge against exchange rate risks. This activity alone temporarily boosts M1.

Spillover Effects of Fed Policy

The future trajectory of China’s economy is now entirely tied to the Federal Reserve’s monetary policy. The market is currently betting that the Fed will cut rates in September. Once the dollar truly enters a depreciation trend, global capital will inevitably flow from the U.S. to emerging markets. As the largest emerging economy, China will undoubtedly be the primary destination for these inflows. An influx of capital will naturally further boost M1, accelerating the formation of the “golden scissors gap.” At that point, the A-share market is sure to experience a rally—this has been the pattern every time in history.

Conversely, if the Fed stubbornly refuses to cut rates in September, it will undoubtedly undermine market confidence and slow the pace of liquidity improvement—this is currently the greatest external uncertainty.

Structural Analysis of Social Financing Data

In June’s social financing data, the increase in RMB loans far exceeded market expectations, serving as the primary driver supporting social financing. Breaking down the loan structure, two points are worth noting:

  • Short-term household loans, which were negative last month, turned positive this month. This was primarily driven by nationwide consumer subsidies, as people took advantage of the discounts to buy electronics and home appliances, naturally boosting short-term consumer loans. However, such policy stimulus has a clear ceiling. Once durable goods are purchased, they won’t be bought again for several years; subsequent subsidies for the same categories will be ineffective unless the product category is changed—for example, subsidizing home appliances this time and furniture next time—otherwise, it won’t stimulate new demand.
  • Medium- and long-term household loans also rose significantly, driven mainly by substantial subsidies for new energy vehicles. Many people have recently been replacing their cars, leading to a concentrated release of demand for auto loans. A slight recovery in the real estate market also contributed to some incremental growth.

Logic Behind the Outlook

A single month’s data spike doesn’t mean much; only sustained, stable growth in medium- and long-term loans over several months truly indicates an improving economic fundamentals. The economy remains in a state of weak recovery; the short-term effects of policy stimulus must align with the restoration of endogenous momentum to truly kickstart a new upward cycle.

For the capital markets, the turnaround in M1 is already a positive signal. Moving forward, we should focus on two key developments: first, whether M1 growth can consistently outpace M2 to form a stable “golden scissors gap”; and second, whether the Federal Reserve will actually cut interest rates in September, opening the door to a depreciation of the U.S. dollar. If both conditions are met, there is no reason why the A-share market should not rise.