The PBOC Balance Sheet
Part 1 of at least 2: The PBOC standing bid
Starting with last week's post on RMB internationalization, my notes on China keep expanding beyond the bounds of my implicit contract with Soon Parted readers. To keep the posts short, I will present them as a series. This is the first part of my analysis of the PBOC balance sheet. The second part is here.
The US-led "contest" with China is taking clearer shape this month at meetings of the G7 and Nato. The bluster of confrontation obscures the fact that the global flows of capital, people and goods are organized into a single global system, and that competition occurs largely within shared acceptance of the rules of that system.
Because much of its day-to-day business is conducted through financial channels, central bank balance sheets provide one of the most informative big-picture windows on that system. So, as part of Soon Parted's contribution to the conversation, I offer a high-level balance-sheet analysis of the People's Bank of China, a bird's-eye view of the Chinese financial system.
The PBOC’s portfolio
Here is a snapshot of the PBOC's balance sheet as of April 30:
The total size of the balance sheet is 38 trillion yuan, about 6 trillion USD at today's exchange rate of 6.4 CNY per USD, or about three quarters of the size of the balance sheet of the US Federal Reserve. The PBOC has a long position in foreign exchange—the world's largest sovereign FX reserve at 21 trillion yuan. Most of the rest of its assets is in the form of credit extended to the country's banking system. This position is funded on the liability side by the reserves of those same banks, currency issue, and a number of smaller positions.
The PBOC's balance sheet, like those of other big central banks, has expanded significantly since 2007. This graph shows the PBOC balance sheet over time. Assets are in the top panel, liabilities below. The regions, which show in different colors the balance-sheet entries over time, are stacked, so that the outer limit measures the overall scale of the balance sheet. The T account above matches the right edge of this graph:
I have added two vertical lines, based on my views on the changing composition of the balance sheet. The first line is in the second half of 2011 and marks the beginning of the end of a sustained period of foreign exchange accumulation. The second is at the beginning of 2017 and marks the end of the beginning of a stable FX reserve position. Between, a period that can be understood as transitional.
The PBOC's balance sheet was managed according to different logic in the different periods, as the graph shows. Today's Soon Parted looks at the earlier period.
Before 2011: The PBOC standing bid
Prior to 2011, the PBOC operated a system of FX accumulation. The charged discourse on this subject is largely unhelpful. But what happened is plain.
The PBOC established what amounts to a standing order to buy USD at the policy exchange rate: the central bank would buy, at a known price, the dollars that were entering the country through the books of its export sector. That exchange rate, adjusted over time, was set at a level that ensured profitable export opportunities. The export sector was ramped up to bring those dollars in. Throughout this period, the presence of the PBOC as a buyer of dollars at an advantageous price provided a key channel of CNY-denominated profit for the export sector.
The transactions could be represented like this:
I have chosen to think of this policy as starting from the central bank's exchange-rate fix. One might instead think of it as starting from the initiative of exporters, or that of importers, or even the banks. But I say it starts with the central bank, acting in coordination with other institutions implementing China's development strategy. Other pieces of the strategy, importantly capital investment, were mobilized to build the export capacity that could take advantage of the central bank's willingness to buy dollars.
To be continued
These T accounts give a schematic view: they show the role of the PBOC in generating profits through the export sector using exchange rate policy.
As the graph shows, that pattern has changed: the PBOC has stopped accumulating FX reserves. I'll come back to the post-2017 logic in a future post.