How much money are we talking about in these hidden reserves, and why are they
such a big risk? Well, I think there's probably a couple
trillion dollars if you want to take a very broad view in additional foreign
assets under the control of China's state.
That includes some of the funds that have been set up under the control of
the state state agency for foreign exchange safe.
That includes some of the entrusted loans that have been provided to allow
the policy banks to do a lot of external lending.
But it also includes a roughly $1 trillion net foreign asset position in
the state commercial banks. And that net foreign asset position has
moved in some ways in the same way you would expect reserves to move if they
were the state banks were being used to help manage the yuan.
So my personal view is that the $3 trillion number that you showed is sort
of an artificial number. It shows what China wants to show the
world. It doesn't show their true the true net
foreign asset position of the Chinese state.
Brian, hold on a second, because we're getting breaking news at the moment.
We are getting more details on the schedule of Secretary Yellen in China.
Now, we understand that she will be meeting with Chinese Premier Li Keqiang
at 4:30 a.m. this is in Eastern time.
She'll also be meeting with vice premier, a former vice premier, Liu, who
at 10 a.m. Central Time.
Now she will be attending a dinner at 6 p.m.
in Beijing with think tank C40. But of course, the key one that we're
watching right now in terms of policymaking, a perhaps a thawing of
bilateral relations, is that meeting with Chinese Premier Li Chung and this
visit to China. Let's return to Brad Setser and Brian,
of course. They are now expected to discuss many
challenging issues between the two sides and one of them, including debt relief
for developing economies. Tell us a little bit about why this here
reserves are so important in terms of what China can do with them in terms of
providing this credit to the world. Well, I mean, the the key source of
hidden reserves was the decision that China took back in 2010 to diversify its
reserves using the policy banks using some state investment funds.
So at least in my view, the underlying source that has fueled the expansion of
Chinese credit globally over the past 12 years has been money that in many cases
was provided to the policy banks out of the reserves.
That would imply that the policy banks that the state administration of foreign
exchange, the PBOC, see the central government has a certain amount of
leverage over the policy banks. If they wanted to push the policy banks
to take losses. So I think it does suggest all along
with the recent deal in Zambia, there's maybe a little bit of hope for a
constructive path forward, but that ultimately hinges on the willingness of
the policy banks to take some losses. Brad, what do you think of the local
government debt situation? Because we know that, you know, leverage
when it comes to government debt was an issue even prior to COVID zero.
And we know that COVID zero put an enormous amount of strain when it comes
to local government coffers. Does that play into the idea that there
is plenty of fiscal buffer for Beijing to be playing with?
Look, I think you have to differentiate when thinking about China's fiscal
capacity between the local governments, which are very constrained.
They are going to be adversely affected by the downturn in property market.
I think that's now well understood. Their dependence, their interconnections
with the real estate sector, with revenues from land sales and the like.
The strange thing about China over the past 15 years is that almost all the
stimulus has come from local governments, local government vehicles.
The central government actually has a very pristine balance sheet.
The central government's debt is only about 25% of China's GDP.
I mean, compared to the major economy, other major economies of the world,
that's a very low number. So China's central government has fiscal
space. Local governments don't.
And it's just a matter of finding a way to use the central government's fiscal
capacity to provide a bit of stimulus. You can't rely on the local governments
or local government financing vehicles in the same way, because they've built
up such a large stock of debt they're already struggled to repay.
The central government can and borrow without limited budget.