Gap between old and new M2 growth rates widens after Bank of Korea strips ETFs from money supply data

Concerns have been raised that the gap between the old and new measures of M2 money supply growth is widening, after the Bank of Korea overhauled its monetary statistics last December to introduce a revised M2 — broad money — measure that excludes exchange-traded funds. The bank plans to publish only the new M2 figure starting this December, prompting fears that statistical continuity could be broken.

An analysis of data obtained from the Bank of Korea by the office of People Power Party lawmaker Park Soo-young, a member of the National Assembly's fiscal and economic planning committee, showed that year-on-year M2 growth in June stood at 12.2 percent under the old method and 6.2 percent under the new ETF-excluded method. The gap between the two measures has widened to 6 percentage points.

In October last year, the two figures were 8.7 percent and 5.2 percent respectively, a difference of 3.5 percentage points. As of July 2019, the gap was limited to 0.6 percentage points.

The Bank of Korea revised its monetary and liquidity statistics last December, removing from M2 short-term beneficiary certificates — those with maturities of less than two years and high price volatility, including ETFs. The move reflected criticism that a rapid surge of funds into ETFs had caused the measured expansion in money supply to appear larger than it actually was.

The bank plans to publish only the revised M2 measure starting this December. Some observers have raised concerns that the change will create a break in statistical continuity.

"The time-series linkage will be severed," Park said, adding that he suspected the Bank of Korea had changed its M2 methodology "to conceal the liquidity increase stemming from the government's fiscal expansion."