from Follow the Money

Hmmm - the PBoC still manages the reserves shifted to the state banks

September 23, 2006

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China

The New York Times (emphasis added):

The People’s Bank of China, the country’s central bank, transferred $15 billion of the country’s foreign exchange reserves to the Industrial and Commercial Bank last year; a year earlier, the central bank transferred $22.5 billion apiece to the Bank of China and China Construction Bank, and both have since conducted initial public offerings here.

…  Although Chinese government officials continue to oversee the management of these foreign exchange reserves, the banks have been allowed to count the money as capital and have used it to offset large write-offs of bad loans. But Chinese banks have engaged in a surge of new loans over the last year that have diluted the proportion of nonperforming loans in their portfolios but have also raised questions about whether another large crop of bad loans may appear in the future.

There is a reason why I generally count the $60b in Chinese reserves shifted (nominally) to the state banks as part of China’s reserves, and add $60b to my global total (warning: the reserves link requires a RGE subscription).  It sure seems like SAFE – not the banks – manages that pool of money.

One point that I left out of my earlier post: when the PBoC shifted its reserves to the banks, it formally shifted the reserves to the state holding company that manages the PBoC’s investment in the state banks, and the PBoC in return received a claim on the holding company (I am not sure if the holding company pays interest to the PBoC though).  That kept the PBoC from taking a loss – if didn’t just give the banks its reserves, leaving it with more liabilities than assets.

Remember, those reserves (an asset) are offset by liabilities (cash, sterilization bills) on the PBoC’s balance sheet.   And any financial institution that gives its asset away will eventually have problems.  Giving reserves – the PBoC’s asset -- to the state banks doesn’t eliminate the liabilities that the PBoC issued when it initially purchases the reserves. 

Of course, the PBoC now has so many assets (probably over a trillion now, not counting the $60b) than in some sense this doesn’t matter too much.   $60b is small …

But it does highlight some of the difficulties using the PBoC’s reserves to finance bank recapitalization – even setting aside the fact that the banks really need RMB-denominated assets to match their RMB deposits, not dollars.

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