China’s May Financial Data: M1 Growth Accelerates, M2 Holds Steady

BEIJING — The People’s Bank of China (PBOC) released its May 2026 financial data on June 12, revealing that narrow money supply (M1) growth accelerated to 5.5% year-on-year, while broad money supply (M2) remained stable at 8.6%. The data offers fresh insights into the state of economic liquidity and the effectiveness of China’s monetary policy transmission.

According to People’s Daily, the M2 balance stood at 353.67 trillion yuan ($49.6 trillion) as of end-May, with growth unchanged from April. M1 reached 114.89 trillion yuan, accelerating by 0.5 percentage points from the previous month. M0, the currency in circulation, grew 11.9% year-on-year.

Context: Understanding the Scissors Gap

The M2-M1 growth differential — known as the “scissors gap” — is a closely watched indicator in China’s monetary analysis. A widening gap suggests funds are being deposited rather than circulated, signaling weaker economic activity. A narrowing gap, conversely, indicates increased circulation and improved economic momentum. May’s data showed the gap narrowing, a positive signal for economic activity.

Key Developments

Expert Commentary: Wen Bin (温彬), Chief Economist at China Minsheng Bank, noted that M2 growth remained stable at a high level while M1 improved despite a rising base. “The concentrated settlement of corporate income tax for the previous year at end-May, combined with further increases in government bond supply, accelerated fiscal deposit growth, putting some pressure on private sector deposits,” Wen explained. However, he highlighted that the renminbi’s safe-haven attributes and strong exchange rate have boosted settlement rates and cross-border capital inflows, providing sustained support for M2.

Wang Qing (王青), Chief Macro Analyst at Dongfang Jincheng, attributed the better-than-expected M1 performance to increased issuance of special bonds for replacing local government隐性债务 (hidden debts). “A considerable portion of these funds will be converted into demand deposits of urban investment platforms, thereby pushing up M1 growth temporarily,” Wang said, as reported by China Economic Net.

Loan and Credit Data: In the first five months of 2026, new yuan loans totaled 9.11 trillion yuan. Household loans decreased by 631.4 billion yuan, while corporate loans increased by 9.63 trillion yuan. Notably, household medium- and long-term loans — a proxy for mortgage demand — increased by only 62.8 billion yuan, reflecting continued weakness in the property market.

Social Financing: Aggregate social financing (社融) for January-May reached 17.48 trillion yuan, a year-on-year decrease of 1.16 trillion yuan. The stock of social financing stood at 458.81 trillion yuan, up 7.7% year-on-year. New social financing in May alone was 2.03 trillion yuan, down 260.7 billion yuan year-on-year.

Analysis: Capital Circulation Restarting

A research report from China Galaxy Securities identified a significant positive trend: the restart of capital flow from households to enterprises and non-bank financial institutions. The report noted clear signs of household deposit migration since Q2 2025, with household deposit growth slowing from 10.7% to approximately 7.5%.

“Household deposits are flowing to enterprises and non-banks,” the report stated. “The wealth effect will also help improve resident confidence, forming a positive cycle.” While still in its early stages, this shift signals that China’s endogenous economic momentum is strengthening, potentially allowing policymakers to transition from “extraordinary counter-cyclical” measures toward industrial policy-driven growth.

Wang Qing cautioned, however, that the current M1 growth rate remains relatively low, and the scissors gap between M2 and M1 persists. “Against the backdrop of continued adjustment in the real estate market and insufficient effective demand, the efficiency of monetary policy in supporting the real economy needs further improvement,” he said, adding that macro policies must focus on vigorously boosting domestic demand.

Household Deleveraging Continues

According to Tencent News/Financial News, household loan growth has slowed since 2024, with the household leverage ratio declining from 62.3% in Q1 2024 to 59.0% in Q1 2026. Industry experts describe this as a natural process of balance sheet repair. “The居民 sector’s自主降低债务负担 and主动修复资产负债表有助于增强家庭抗风险能力，为经济长远健康发展打下微观基础,” one market observer noted.

What’s Next: Policy Outlook

Looking ahead, analysts at China Galaxy Securities identified Q3 2026 as a potential window for monetary easing. Under a baseline scenario — assuming the Strait of Hormuz remains navigable and oil prices stay under $100 per barrel — China’s PPI is expected to peak in July, after which imported inflation pressure would ease, opening space for rate cuts of 10-20 basis points and a reserve requirement ratio (RRR) cut of 50 basis points.

However, the outlook is contingent on geopolitical developments. Should energy and resource prices surge amid escalating conflicts, China’s PPI peak could extend into 2027, and the central bank would likely refrain from broad easing tools, instead relying on targeted structural measures.

As China’s economy navigates this complex landscape of monetary normalization, property market adjustment, and external uncertainties, the May financial data offers a cautiously optimistic signal: liquidity is improving, capital circulation is restarting, and the foundation for endogenous growth is gradually being rebuilt.