For the month of May 2021, China’s central bank reported almost exactly the same as it had in April (or March). In the case of foreign assets, as has become standard, nearly identical. Despite reflation dollar flows being described and talked about, they still haven’t reached the official PBOC balance sheet which after so many months of this simply reduces the charade to a mockery.
Something is going on in the shadows, and one thing it can’t be is the usual reflationary dollar inflows. If there are those, they are taking a different route and seemingly ended up in very different places. Whatever your preferred explanation at this point – many people seem to like the idea of China corporates holding their dollars offshore for whatever reasons – perhaps the most important question is, why?
In my view, it’s likely pretty simple: the desire to engage in manipulation is inversely proportional to normality in global money flows. The less normal, the more officials in China have shown their tendencies (at times aggressive) to hide this. The question is how and where it all comes out on the other side (another good theory is state-owned banks, off their balance sheets, too).
There is no way to settle the matter so we’re left to simply point it out month after month; after all, if this game of hide-the-dollars hadn’t been figured out after the several years of China playing it, then tip your cap to the PBOC for its stealth and persistence, and move on to the “why” even if sincerely frustrated over no luck with “what.” Whatever, in May “it” still happened.
The one benefit – if you can call it that – is how this makes the rest of the central bank balance sheet incredibly simple. With no inflowing forex assets to speak of, expansion is left entirely to a single RMB asset line: Claims on Other Depository Corporations. This contains liquidity programs such as the MLF which policymakers have used to create monetary space in lieu of those dollars.
So, if no forex gains and not any in the MLF and related, then the PBOC balance sheet is pretty much stuck – by purpose and choice. Use in this area is largely up to monetary officials, therefore if they aren’t using it any more than they had, this is an indication of intent.
As you can see above, they aren’t using it beyond the usual maintenance.
Without growth and expansion coming from somewhere on its asset side, it’s a familiar story over in the liabilities (money). Physical currency issue has been cut back (less growth) so that year-over-year, on average, currency in RMB is increasing at the same low pace as before 2020. Not that currency was all that explosive during 2020, but it was at the very least more noticeably responsive.
All that’s really left (apart from accounting for government deposits) is bank reserves. Even less than currency, bank reserves had never been increased all that much (certainly not in proportion to the severity of the situation last year) and the systemic balance of them through now May 2021 shows no change in official policy intent.
Put it all together: abnormal dollar situation, less currency and not much bank reserves. Like Xi has been saying all along, there’s not going to be any RMB cavalry riding to the global economy’s rescue. Rather, the Chinese seem well aware of the faults in the global economy, the various shortfalls being exposed in it, and are quite content instead to limit their own exposures to them.
So far as the Chinese are concerned, both fiscal and monetary, this is it; as good as it will get and it’s not all that good.