As Fed And ECB Seek Exit, China Holds Firm To $5 Trillion Anchor

China’s $5 trillion hoard is here to stay for the time being — and could even still expand, where as the European Central Bank’s asset pile should stop growing by the end of this year as the outlook brightens, and the Federal Reserve’s $4.5 trillion asset pile is set to be shrunk.

Run up through years of capital inflows and trade surpluses rather than hoovering up government bonds, the PBOC balance sheet is a fundamentally different beast from its global peers. Despite this, it still matters for the global economy. Making the variable key for stability in a year when political transition in Beijing is in the cards, a bigger change than ever is being felt by changes in the amount of base money in the world’s largest trading nation.

“China is more than a couple of years away from balance-sheet contraction,” said Ding Shuang, chief China economist at Standard Chartered Plc in Hong Kong, pointing out that the growth in the broad money supply is still behind the government’s target.

Though that was mostly through seasonal factors related to liquidity operations around the Lunar New Year, when the demand for cash surges, the balance sheet has broadly leveled off, and contracted in the first quarter of this year. Now, the PBOC may need to use reserves to support the currency even as trade surpluses keep piling up and is still wary of accelerating cash outflows from China with the Fed set to raise rates this year.

In the survey of 21 institutions including Bank of China Ltd, Nomura Holdings Inc. and Societe Generale SA., more than 70 percent of economists said they predict that the balance sheet will be around the same size or bigger by the end of the year. While six said it would contract further, four economists said the balance sheet would expand.

The PBOC balance sheet can’t really be compared with those of central banks in developed nations as it involves more complicated factors, China’s policy makers said last month in their quarterly monetary policy report. It said that financial reforms, seasonal factors, monetary tools, fiscal policy, and foreign exchange purchases, affect the holdings.

“Shrinking the balance sheet doesn’t mean tightening monetary policy,” the PBOC said in the report. while also easing monetary policy, the balance sheet may actually get reduced by lowering the reserve requirement ratio for banks amid capital outflows, it added.

Already massive capital inflows that it had to manage, are being seen in China achieved through its trade surplus and foreign direct investment, while lending freely to banks and buying government assets has bene the modus of rescuing their economies after the financial crisis for the Fed and other developed-market central banks. Hence the balance sheet of PBOC kept growing due to its sterilization of those inflows — buying foreign currencies and injecting yuan into the economy.

According to Ming Ming, a former central bank monetary policy official who’s now head of fixed-income research at Citic Securities Co. in Beijing, the balance sheet will stay stable this year as long as capital outflows remain subdued or halted, all things considered.

“China’s economy hasn’t come to a situation where it can tighten monetary policy to the extent of balance-sheet shrinkage or assets sales,” he said. “Monetary policy will remain smooth and neutral this year.”

(Adapted from Bloomberg)


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