For China’s central bank, the 36 percent stock market rally through Jan. 16 spurred in part by a surprise November interest-rate cut is the latest reminder that it’s easier to unleash money than to guide it to the right places.

Since Zhou Xiaochuan became People’s Bank of China governor in late 2002, the broad money supply base has expanded almost seven times to 122.8 trillion yuan ($20 trillion) while the economy has grown about five times. That translates to a M2/GDP ratio of about 200 percent versus about 70 percent in the U.S., according to data compiled by Bloomberg.

That liquidity springs up like a jack-in-the-box, driving property prices, then shifting to stocks, before moving on to whatever may be next. Such sprees help explain the PBOC’s reluctance to cut banks’ required reserve ratios even as the economy slows. Instead, it’s trying targeted tools to guide money to preferred areas such as farming and small business.

“The central bank will continue to face structural challenges in 2015 and beyond,” said Shen Jianguang, Hong Kong-based chief Asia economist at Mizuho Securities Asia Ltd. “Funds aren’t flowing into economic activities on the ground. Instead, people are adding leverage to speculate.”

China’s benchmark stock index plunged the most in six years on Monday in Shanghai, led by brokerages, after regulatory efforts to rein in record margin lending sparked concern that speculative traders will pull back from the world’s best-performing stock market in 2014.

Citic Securities Co. and Haitong Securities Co., the nation’s two biggest listed securities firms, fell by the 10 percent daily limit after they were suspended from lending money to new equity-trading clients.

Regulators Concerned

“Regulators are concerned about risks, especially about leveraged stock buying from small retail investors,” said Ding Shuang, senior China economist at Citigroup Inc. in Hong Kong. “China’s overall money supply is getting less loose, and conditions for massive speculation may have gone.”

Ding added that the central bank will continue to adopt “targeted easing” in 2015. Meanwhile, the PBOC will also have to take the broad-based measures of cutting banks’ RRR and benchmark interest rates to bring down financing costs.

When China was spurring lenders to pump credit to aid growth in 2008 and 2009, investors speculated on everything from Pu’er Tea to oil paintings. Easy money also pushed up housing prices, forcing local governments to place restrictions on home purchases.

“In the past, they would have put it in property, but now the cash is going to the equity market,” Zhang Zhiwei, Hong Kong-based chief China economist at Deutsche Bank AG, said in an interview on Jan. 7.

Policy Implications

Zhang was among economists who last month said the surging stock market may delay an RRR cut.

“The equity plunge is not related to economic fundamentals,” said Dariusz Kowalczyk, a Hong Kong-based strategist at Credit Agricole CIB. “In fact, this will make it easier for PBOC to ease monetary stance without fears of stoking another equity market bubble.”

China’s central bank said in a statement this month that it will ensure “reasonable and sufficient liquidity” in 2015 to create an appropriate monetary environment. In its first major targeted operation announced on Jan. 16, the PBOC said it has increased a re-loan quota by 50 billion yuan to encourage lending to farming and small businesses.