A number of voices have begun loosely using the term “liquidity trap” to argue that stronger credit growth in China has failed to provide a greater boost to output because firms are hoarding cash rather than spending it. But the money supply data being used to support these claims do not, on closer scrutiny, appear consistent with the narrative that firms are sitting on growing piles of cash. Instead, we think the main reason policy easing has failed to gain more traction is simply that credit is being spent less and less efficiently.
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