China's Foreign Asset Position and Its Missing Domestic Inflation
Brad Setser writes:
RGE - $1.5 trillion, not $1.1 trillion – and rising fast: China formal reserves were a bit under $1.1 trillion – think $1.066 trillion – at the end of last year. No doubt they are close to $1.1 trillion, if not above it, now. No wonder China’s central bank government just made it quite clear that the PBoC doesn’t really want any more reserves. Zhou, quoted by Reuters:
Many people say that foreign exchange reserves in China are (already) large enough.... We do not intend to go further and accumulate reserves...
Zhou’s statement is probably yet another sign that the growth in China’s reserves this year has been kind of fast -- and that the PBoC doesn't really want to continue to absorb the lion's share of the all the dollars that are now piling up in China. But even now, the PBoC (though SAFE) is not the only Chinese institutions that have been adding to their foreign assets. James McCormack of Fitch just released a quite interesting new report (registration with Fitch required) that estimates that China now holds $1.55 trillion in foreign assets. And by China, Fitch effectively means China, Inc. Most foreign assets not held by SAFE are held by various state companies and state banks. Especially the state banks – Fitch, drawing on data from IMF, estimated China’s banks hold $273b in foreign assets, a $50b increase last year. And it isn’t clear if that total – or for that matter China’s balance of payments data – counts the funds the banks raised in their offshore IPOs.... McCormack estimates that China added $342b to its foreign assets last year. And even before China created the “People’s Investment Company” nearly $100b of the increase was coming from outside the central bank and wasn’t taking the form of reserves.
That squares with my own estimates – Chinese reserve growth, as large as it was, has been well below what it should be, given China’s burgeoning current account surplus and ongoing net inflows of FDI. Large hot money outflows could explain the difference, but, well, all the evidence suggested that private money wanted to get into China and its booming equity market, not get out. The other explanation: the state banks, state insurance companies, state pension funds and state companies all helped the PBoC out....
I don't think the pace of growth in China’s foreign assets has slowed. If anything it probably picked up on the back of the still growing trade surplus. So keeping something like the status quo in place – and by status quo I mean the current exchange rate regime and ongoing Chinese openness to greenfield FDI – requires that someone in China add $400b or more to their stock of foreign assets. Private Chinese citizens don’t seem very keen on adding to their foreign assets. Not when those assets yield even less -- in RMB terms -- than domestic deposits. And if the PBoC doesn’t want to add to its foreign assets either, well, the People’s Investment Company will get really big fast...
But it's not just that the state, the semi-state, and the state-owned-enterprises are acquiring enormous dollar denominated assets. They are acquiring enormous domestic renminbi liabilities as well. And I can't figure out why it hasn't produced a big burst of domestic inflation yet. I understand that debt isn't very much like money, but it is somewhat like money.
Maybe I can corner Galina Hale on Friday and make her tell me, if she understands...
