M1 reflects the actual purchasing power in the economy; M2 reflects both reality and potential purchasing power. If M1 grows faster, the consumption and terminal market will be active; If the growth rate of M2 is faster, the investment and intermediate market will be active.

the central bank and commercial banks can judge monetary policy accordingly. M2 is too high and M1 is too low, which indicates that the investment is overheated, the demand is not strong, and there is a crisis risk; M1 is too high and M2 is too low, which indicates that there is strong demand and insufficient investment, and there is a risk of price increase.

2. Different types of deposits:

M1 includes cash (banknotes or tokens), traveler's checks, current deposits or other cheque deposits. These currencies can be directly used as a medium of exchange for various transactions and payments.

M2 is the addition of other savings deposits (such as time deposits in banks, the balance between money markets and funds, and deposits from other financial institutions) on top of M1. The amount of money in circulation is also called money stock.

3. Definitions:

At present, the classification of monetary hierarchy in China is:

narrow money (M1) = M+unit demand deposit payable by cheque

broad money (M2) = M1+resident savings deposit+unit time deposit+unit other deposit+customer deposit of securities company.

Currency stratification, also known as currency hierarchy, refers to that when determining the statistical caliber of money supply, the central banks of various countries take the liquidity of financial assets as the standard and divide the currency hierarchy according to the characteristics and needs of their own policy objectives. The division of monetary levels is conducive to the central bank's macroeconomic operation monitoring and monetary policy operation.

Hierarchical division

At present, the academic circles in China are not unified about the division of monetary quantity. Some people advocate the division based on the speed of monetary turnover, some advocate the division based on the level of monetary realization rate, and some advocate the division based on monetary liquidity. If it is divided according to liquidity, its basis is: (1) It can relatively accurately grasp the differences in the circulation characteristics or activity of various specific forms of money in the circulation field;

(2) on the basis of mastering the liquidity, grasp the liquidity cost, the stability and predictability of its own price;

(3) On the basis of analyzing the dynamic changes of the economy, the central bank strengthens its control over a certain level of currency.

The People's Bank of China started in the third quarter of 1994, and formally determined and published the money supply index quarterly. According to the actual situation at that time, the division of money levels was as follows:

M= cash in circulation;

M1=M+ corporate demand deposits+deposits of institutions, organizations and troops+rural deposits+credit card deposits held by individuals;

M2=M1+ savings deposits of urban and rural residents+fixed deposits in corporate deposits+trust deposits+other deposits;

M3=M2+ financial bonds+commercial paper+large negotiable certificate of deposit, etc.

In China, M1 is the narrow money supply, M2 is the broad money supply, and M3 is added for financial innovation.

division basis

Returning to the division standard of liquidity, it is not difficult to see that the liquidity standard of China's monetary hierarchy division is based on the domestic liquidity of the financial asset. Some Differences between China and the United States on Currency Stratification: If the M system of China and the United States is the same, the cash with practical economic significance in the United States is M1, while the cash with practical economic significance in China is much smaller than M1. This difference makes China's economic units have insufficient currency in circulation, while the United States has abundant currency relative to China.

The reason for this difference is that China's cheques cannot be directly converted into cash, even though it is currency.

For example, under the M2 project, if the M2 is the same, the savings in China is very large, but there are few currencies in circulation that have practical economic significance, because the M2 in China is occupied by high savings, while the United States is almost all M1 (the American savings rate is very low), that is, it is actually all M, that is, most of them are cash, and there are enough currencies with economic significance in the market. China, on the other hand, is seriously short of money with practical economic significance.

This is why the United States has always tended to use M2 to regulate its currency.

therefore, at the same level of M2, M1 and M, the M system in the United States has more money with practical economic significance.

In addition, the reason why China lists the cash in circulation as a single level is: compared with western countries. China's credit system is not developed enough. Cash accounts for more than 3% of the narrow money supply M1. The amount of cash in circulation has a great impact on China's consumer goods market and retail prices, and excessive issuance of cash will lead to price increases.

If China's financial reform only changes this M-system, China's actual economically significant money will increase by more than 1 trillion (savings will be converted into checks, and checks can be freely exchanged for cash), but the total amount of money will not need any change.