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Thursday, June 17, 2021

Where has all the money gone?

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While money supply has risen sharply, the channel via which money is pumped into the open market is closed. Then, where has all the money gone?

Several conclusions on the developments of money supply and credit can be withdrawn from macroeconomic analytical reports relying on updated data of the volumes of transactions on the open market. A case in point is the report on the money net-pumped via the open market and foreign exchange channels. As the balance of the channels was zero during the first few months of this year, it could be concluded that Vietnam’s monetary policy “remained careful and was highly stable”(1). Is this really so?

In reality, during that time, money supply increased rather strongly, even higher than in the same period last year, which was considered way higher than the global average rate. Precisely, according to the State Bank of Vietnam (SBV), by April 16, Vietnam’s total money supply (M2) had grown by 2.9 times from December 2020, and 15.7% from the year-ago period (the growth rate of entire 2020 was 14.5%).

The following table is compiled by using M2 figures posted on the SBV’s website whose constituents were deposits by economic institutions and individuals in Vietnam dong, updated to February 2021. The ratio of money in circulation to M2 was also announced, whereby the volume of money in circulation available, in other words cash outside the banking system, can be calculated. The item “deposit by economic institutions and citizens in foreign currencies” is obtained by deducting others items from the total money supply.

The above box shows that Vietnam’s monetary policies have in fact continued the remarkably loosening trend over the time. To put it differently, it is not correct to rely solely on transacted volumes on the open market (and foreign exchange) to jump to the common conclusion of the monetary policy.

Anyway, the questions to be posed here is while money supply has increased strongly and the money pumping channel via the open market has been closed, then, where has all the money gone? In other words, how come the SBV was able to pump a considerable volume of money into the economy without using the open market channel (and the foreign exchange buying channel)?

To answer this question, we first have to know about traditional channels via which central banks employ to inject money into the economy. They are (i) decreasing compulsory reserve; (ii) decreasing rediscount rate for short-term loans extended by the central bank to commercial banks; and (iii) buying valuable papers (government bonds and bills) issued by commercial banks on the open market. Furthermore, unusual channels may entail foreign exchange purchases (currently in Vietnam) and quantitative easing (in the United States).

Of the above vehicles, taking into account the time from the beginning of this year until now, the compulsory reserve channel can be eliminated because the SBV did not revise down the rate of compulsory reserve during that time. The foreign exchange tool was not likely to be used by the central bank to pump money over the past few months as reported by the press. The same might be true to the quantitative easing as there was no relevant information.

However, it might not be true to argue that the SBV did not pump money via this vehicle. Although the SBV both sell and buy valuable papers, which means it pumps and withdraws money at a zero level of net selling, there may be a margin at a certain time, for instance on the last day of a statistical cycle (end of month or end of quarter) when the amount of money pumped out is bigger than the withdrawn volume, which results in a positive net selling. To simplify this matter, let’s remove it out of the list.

Then, only the last channel should be considered, the rediscounting channel (and recapitalization). The SBV has released almost no data in this regard. However, that does not mean we can conclude this channel has not been resorted to in order to pump money into the economy. One of the evidences relates to the fact that financial reports of every bank have the item of loans extended by the central bank. These loans may be in the form of recapitalization loans using valuable papers such as government bonds, VAMC (Vietnam Asset Management Company) bonds, or in the form of recapitalization loans for banks carrying out government plans (for instance, the SBV extended recapitalization loans at 0% to the Vietnam Bank for Social Policies so that this bank could implement the support package worth VND16 trillion).

We can look to this specific case of the Q1 financial report of the Vietnam Joint Stock Commercial Bank for Industry and Trade (VietinBank) to have a clearer idea of the matter. The bank had a loan from the SBV worth VND1,854 billion at the end of the first quarter. Of this, “loans in accordance with credit dossiers” were worth VND1,847 billion, and the rest went to “loans extended to support State-owned enterprises.”

Finally, as the cash item in the above table surged in February 2021 by 16.3% year-on-year, it can be said that part of the M2 increase in one way or another permeated into the economy in the form of cash.

In short, there were different ways via which a bigger volume of money went into the economy over the past time although the balance of net selling and buying on the open market was zero. In other words, when statistics show that M2 has increased strongly, it means money has been strongly pumped into the economy correspondingly.

By Phan Minh Ngoc

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