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China has more foreign exchange reserves than expected, a former treasury official wrote.
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A further $3 trillion is hidden in “shadow reserves”, such as commercial banks and state policies.
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“Not everything China does in the market now appears on the PBoC’s balance sheet.”
Half of China’s foreign exchange reserves are “hidden”, a situation that could add risks to the global economy in the future, wrote former Treasury Department official Brad Setser.
While the country’s National Administration of Exchange reported $3.12 trillion in foreign assets last December, Setser estimates that foreign exchange reserves are actually around $6 trillion.
“China is so big that how it manages its economy and its currency matters enormously to the world,” he wrote in The China Project. “Yet over time, the way it manages its currency and foreign exchange reserves has become much less transparent, creating new kinds of risks for the global economy.”
A key indicator of China’s reserves is a sudden pause in its reported activity. From 2002 to 2012, China’s foreign exchange reserves steadily increased as the central bank bought US dollar assets to prevent the Chinese yuan from appreciating too much, allowing exports to remain cheap.
But over the past 10 years, China’s reserves have stopped growing, which is surprising as China’s trade surplus has continued to grow and is currently at an all-time high, he said. .
Setser, who previously served as the Treasury’s deputy assistant secretary for international economic analysis and is now a senior fellow for international economics at the Council on Foreign Relations, has an idea of what’s going on.
“Just as China has ‘shadow banks’ – financial institutions that act like banks and take the kind of risks a bank might normally take but aren’t regulated like banks – China could be called ‘shadow reserves. “Everything China does in the market does not now show up on the PBoC’s balance sheet,” he said.
China’s state-owned banking system is Beijing’s main way of hiding its reserves, Setser said. This includes state commercial lenders like the Bank of China, the Industrial and Commercial Bank of China or ICBC, the China Construction Bank and the Agricultural Bank of China as well as political banks like the China Development Bank and the Export-Import Bank of China.
China’s State Administration of Foreign Exchange did not immediately respond to Insider’s request for comment.
China’s large amount of reserves weighs heavily on financial markets and poses a risk.
For example, Setser said China’s earlier accumulation of US Treasuries and agency bonds – such as Freddie Mac and Fannie Mae securities – helped cause the 2008 financial crisis, pushing investors further towards riskier mortgage-backed securities.
“China’s lack of transparency here is a bit of a problem for the world,” he said. “China is structurally so central to the global economy that everything it does, seen or unseen, will ultimately have a huge impact on the rest of the world.”
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