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CiteThe Economist’s article draws heavily on the work of Logan Wright of Stone and McCarthy, who has done superb work on this topic.
Logan Wright, a Beijing-based analyst at Stone & McCarthy, an economic-research firm, has done some statistical detective work to make sense of the figures. The first problem is that reported reserves exclude the transfer of foreign exchange from the PBOC to the China Investment Corporation, the country’s sovereign-wealth fund. The reserve figures have also been reduced in book-keeping terms this year by the PBOC “asking” banks to use dollars to pay for the extra reserves that they are now required to hold at the central bank. Adding these two items to reported reserves, Mr Wright reckons that total foreign-exchange assets rose by an astonishing $393 billion in the first five months of 2008 (see chart), more than double the increase in the same period last year.
I literally have nothing to add! Do check out the chart that accompanies the article; it highlights that China’s current foreign asset growth, annualized, is a lot closer to a trillion dollars than half a trillion dollars.
Logan Wright’s article on the bureaucratic rivalry between SAFE and the CIC — itself a spillover of the rivalry between the PBoC and the Ministry of Finance — is also well worth reading.
When I visited Beijing last November, a journalist based there quipped that the PBoC and the Ministry of Finance have been at each others’ throats since 1949. Their rivalry historically hasn’t had much impact on the rest of the world. Now each influences – as the CIC is consider closer to the Finance Ministry than to the PBoC, though it reports to the State Council — a rather substantial pool of funds to invest abroad. And given how fast China’s foreign assets are growing, each could soon control a lot more funds.
A future division of labor between CDC and POBC/SAFE along the lines envisaged by Logan makes sense. (1) China needs an entity to hold the remaining government stakes in financial institutions (2) and that entity should not be the PBOC (the banking supervisor).
As always, the PRC gvt needs to solve many overlapping problems. I would guess that the financial return on the international reserves (held by whomever and however named) has a lower priority than keeping control of the main channels of finance in China and so has the need to keep the foreigners in the dark about reserve volume and movements. I would tend to see the creation of CIC as a sign that the state council (Mr Lou had a very important (but junior) post in the State Council and was head of the NDRC, the closest you can get to a PRC equivalent of a “developmental state”‘s central economic bureaucracy, is looking for ways to retain control over the state business sector. In the old bird cage analogy, probably the POBC has people who want to get rid of the birdcage altogether, whilst the State council is nor ready for that, but may want to continue expanding it, whilst keeping control. The state continues to be paternalistic, a wise policy as the responses from the public after the earthquake show.
People have probably attached to much importance to the international investment role of the CIC.
Whatever this will turn out to be, I do not believe that it is going to be anything like the SWFs of the Gulf countries, Norway or even Singapore’s GIC. That still leaves the questions of , if, by whom and to what extent, the PRC FX reserves will be managed in a less risk-averse fashion. But the state council’s chief priority is probably that they appear as small s possible..
Mr Rien Huizer
Sorry, wasn’t sure which (if either) is your family name , the SAFE/CIC split is strangely similar to the temasek/GIC split. Curiously, temasek is viewed as more aggressive but GIC aint tame either. The way it looks, CIC was set up as a sovereign investment fund whilst SAFE as its acronym suggests was to keep control and safeguard the reserves it got.
Brad
Bit befuddled, story of my life, I know… Won’t the final reserves figure encompass dollar reserve requirements held by the banks as per PBoC policy? Won’t those reserves be counted as a liability of the PBoC? (being an asset of the banks subject to PBoC regulations)?
Another dumb question: who decides what proportion of reserves goes to CIC or SAFE ? Treasury functions belong to PBoC or the ministry?
Mr Huizer
sorry, the last sentence ought to read ” keep control of and safeguard the reserves it has been assigned by the relevant authorities”
Rien — I agree with your argument that the CIC isn’t going to look like the Gulf SWFs, let alone Norway. It has something of Temasek’s role (tho not entirely, as SASAC also is a holding company) and perhaps a new role of helping chinese firms expand abroad. A GIC type portfolio has in theory been grafted on to the CIC’s domestic stakes, but it isn’t at all clear that this works.
What bothers me is that China thinks it can claim the CIC is a commercial investor with a mandate to make money when it has this large domestic strategic role. Or perhaps what bothers me is that the press/ analysts tend to accept the CIC’s claims here uncritically when its portfolio doesn’t support those claims!
Judy — your point is a reasonable one. some countries do count dollar reserves on deposit from the banks at the central bank as part of their reserves. China tho didn’t want to disclose a high reserve total, so the whole system has been structured in a different way. The $ reserve requirement shows up on the pboc’s balance sheet as other foreign assets not as reserves. Write Logan Wright of stone and mccarthy and get his full report then we can talk — or look at some of Stephen Green’s stuff.
it doesn’t make total sense, i agree — but it is clear that China has wanted to mask the true size of its fx asset growth since late 05 (when it started doing swaps with the state banks — and reserve growth seemed to slow for a while).
Judy,
The Temasek/ GIC split seems very similar to whatever we see in China. Except, on the surface, CIC seems to be very small compared to Safe, until you start looking at CIC’s bank stakes..CIC is probably by far the largest bank holding company in the world. BTW, Rien is my first name.
Brad,
Analogy may be too strong, inspiration perhaps? Mr Zhu R Z was mightily impressed when he visited Spore in 1998..Of course a city state like Singapore is under entirely different conditions.
As Marx said: we all make our own decisions, but under different circumstances.
Competition is not always a bad thing.
Then again having two agencies that hate each other trying to do the same sorts of things may not be such a bad thing. If you structure things they right way, then both agencies can keep each other honest.
One problem with trying to coordinate things is that at this point you’ve created a third agency. The funny thing is that if the State Council tries to create a third agency to oversee all investments, I bet that CIC and SAFE will put aside their differences and try to quash the third agency.
(And the there is the fact that SAFE and PBC, CIC and MOF have complex relationships.)
A lot of the differences between MOF and PBC are cultural ones that come from the backgrounds of the people in them. MOF tends to consist more of people that are development oriented whereas PBC tends to be more technocratic.
CIC seems to be closer to MOF than PBC because Huijin came from MOF. At the time, I suspected that the reason that Huijin got moved to CIC was to reduce the influence of the MOF.
2fish — huijin came from the PBoC. moF wasn’t happy that the use of fx reserves in the recap gave the pboc ownership of the state banks — shifting huijin to the cic was one way of getting it out of the pboc’s hands.
One division in Chinese politics is between “populists” and “technocrats.” Populists tend to be from the interior, more interested in state intervention. Technocrats tends to be from the coastal regions and much more skeptical of government intervention.
One way of viewing Chinese politics is that the Communist Party is a coalition of these two groups, both of which have different interests, but both of which need to work with each other within the underlying framework of the CCP.
One interesting things about government positions is that there is often a rigid division of seats between populists and technocrats. In CIC for example, the chairman is a populist, but the general manager is a technocrat.
I got the sense that Huijin was more under the operational control of the MOF than the PBC. Certainly the PBC wasn’t terribly happy with the amount of control that MOF had over Huijin. A lot of the money from Huijin came from the MOF.
One reason I think that Chinese SOE’s work is that these sorts of battles between agencies of the Chinese government are very similar to the boardroom battles between institutional shareholders in private companies.
Lou Jiwei is the eptiome of the developmental state, but Gao Xiqing, the general manager, is the eptiome of Wall Street. He has a law degree from Duke University, became the first PRC citizen to pass the New York bar exam, and worked on a Wall Street law firm for two years.
The fact that you have two very different people in charge of CIC is not an accident.
Another reason why PBOC cannot own the bank shares is that it violates Pillar 2 of the new Basle II accord on bank supervision. Capitalist rationality meets post communist rivalry! But Twofish, there is still the not so small matter of managing the state’s equity stakes in the 1000 SOEs that were to be retained and grown (almost the same intention as the Singaporean state’s when it wrote the Temasek Charter), whilst the other SOEs would be more or less cast adrift (1997 NPC). So there could be a third agency…