China has $1946 billion in reserves. The PBoC had another $185 billion in “other foreign assets” at the end of November. Given the fall in China’s reserve requirement, now likely has maybe $160 billion and perhaps less. The PBoC therefore already manages a portfolio in excess of two trillion dollars. The CIC has around $90 billion (less if it marks to market) – as it spent $67 billion acquiring Huijin (China’s existing bank recapitalization vehicle), $20 billion recapitalizing the CDB, $3 billion of China Everbright and $19 billion on ABC. The state banks have at least another $100 billion in foreign assets. Sum it all up and the foreign portfolio of China’s government is north of $2.3 trillion.
Consequently it should be a surprise that China’s government now has close to a trillion in Treasuries. OK, not quite a trillion. But darn close. $860 billion or so at the end of November and – if current trends continue — over $900 billion at the end of December.
China also has $550 billion or so of Agencies, which are effectively now backstopped by the Treasury. That works out to an enormous bet by China’s government on US government bonds.
These are just a few of the conclusions of a new paper, China’s $1.7 trillion dollar bet, that I co-authored with the CFR’s Arpana Pandey.
This paper presents detailed estimates of the growth of China’s foreign portfolio, taking into consideration the increase in China’s hidden reserves. The story is here is simple: China’s reported reserve growth from mid-2007 to mid-2008 understates its actual reserve growth, as the government forced the banks to hold dollars to meet a portion of their reserve requirement. There isn’t any real doubt about this; the PBoC’s reported an enormous increase in its “other foreign assets.” These hidden reserves are now coming down; China’s reported reserve growth now somewhat overstates the true pace of its reserves growth.
The more innovative portion of the paper presents a detailed portrait of the evolution of China’s portfolio over time.* Our estimates of China’s US portfolio are the result of a lot of detective work. China’s recorded US purchases have – until recently – clearly understated China’s real purchases. The challenge was working out a way to estimate, China’s true purchases using the US data.