Xi Jinping, China’s president, speaks during day two of the Eastern Economic Forum in Vladivostok, Russia, on Wednesday, Sept. 12, 2018. The 4th annual Eastern Economic Forum, held in Vladivostok, will run from 11-13 September. Photographer: Andrey Rudakov/Bloomberg

Chinese stocks have taken a hit in the past few weeks. The Shanghai Composite Index has tumbled by over 9% in the past thirty days, and for the year, the Index has shed 25%. This weakness in the equity markets reflects an anticipation that China’s economy might be cooling down.

Well, is a cool down in the cards? To answer that question, we must look at the money supply, broadly measured. Indeed, for me, a monetary approach to national income determination is what counts. The relationship between the growth rate of the money supply and nominal GDP is unambiguous and overwhelming. For example, just consider that in China from 2003-2017, the money supply grew at an annual rate of 14.92% and nominal GDP grew at a 14.67% annual rate.

So, what is China’s monetary temperature? Let’s first determine the “golden growth” rate for the money supply, and then compare the actual growth rate in China to the golden growth rate. To calculate the golden growth rate, I use the quantity theory of money (QTM). The income form of QTM states: MV=Py, where M is the money supply, V is the velocity of money, and P is the price level, and y is real GDP (national income).

Let’s use the QTM to make some bench calculations to determine what the “golden growth” rate is for the money supply. This is the rate of broad money growth that would allow the People’s Bank of China to hit its inflation target. I have calculated the golden growth rate from 2013 to the present—that’s the period in which President Xi Jinping has been in power.

According to my calculations, the average percent real GDP growth from March 2013 to September 2018 was 7.03%, the average growth in Total Money Supply (M2) was 10.26%, and the average change in the velocity of money was -1.83%. Using these values, and the People’s Bank of China’s inflation target of 3.00%, I calculated China’s golden growth rate for Total Money (M2) to be 11.86%.