However, some mainland bankers, who requested anonymity, said it was highly unlikely that state-backed banks would sell products tied to low-return local government projects because they wouldn't want to risk social unrest if the products went sour. They added that only lowest-risk loans were repackaged into wealth management products. If that is true and banks have sold off their best assets, it raises questions about the credit-worthiness of what is left on bank balance sheets, said [Charlene] Chu of Fitch Ratings. SCMP, Sept. 26 Let's look at one of these assets 'left on bank balance sheets', an item obscurely classified in the official statistics as 'financial institutions position for forex purchases'. This category of assets now amounts to 25.3 trillion yuan. Yes, 25.3 trillion yuan. To put it in perspective, this is equal to about a third of the total deposits of the banking system. Call it US$4 trillion or HK$31 trillion, which would come to about 18 times Hong Kong's annual gross domestic product. How do you spell colossal, gargantuan, humungous? And, bigger question yet, what would mainland banks want with such an enormous foreign exchange position? China still has a closed capital account, which means that its banks do not have much scope for any involvement in foreign financing activity. But it is actually the mainland's government that wants this forex position. It found, however, just as bank robber Willy Sutton did, that it had to go the banks 'cuz that's where the money is'. More specifically, Beijing has long rigged the yuan's exchange value at an artificially weak level. This has had the inevitable result in the balance of payments of creating a huge inflow of foreign currency, all of which has to be mopped up and shipped back out as foreign reserves if a closed capital account is not to be an outright joke. Thus exporters are forced to surrender their US dollar receipts to the People's Bank of China (PBOC) in exchange for yuan, which the PBOC raises largely by slapping a hefty statutory reserve requirement on commercial banks. The toll stands at 21 per cent of bank deposits at present, up from 6 per cent only eight years ago, an increase that coincides neatly with the build-up of foreign reserves over the period. But of course the PBOC will never tell you this. The fiction is that statutory reserve requirements are a tool of monetary control to restrain inflation. The statisticians must thus find an anodyne description of them when classifying bank balance sheets. The latest choice is to lump them in with other bank forex holdings and call it all 'financial institutions position for forex purchases'. Tell me that your eyes didn't glaze over on reading this bit of baffletalk. It's effective baffletalk. It did what it was intended to do. And now we get to the difficulty. The PBOC cannot really take this much money away from the banks without paying the banks some interest on it. The banks get the money from depositors, after all, and must pay these depositors some interest. But the PBOC is a pretty stingy central bank, as the chart shows. It pays only 1.62 per cent at present on the massive statutory reserves that it extorts from the banks. At the same time, however, it has pushed up interest rates that the banks must pay others. The bank six-month deposit rate now stands at 3.3 per cent. Do the maths on how many hundred billion yuan a year the shortfall is likely to be. And we haven't begun to talk yet about an estimated 12 trillion yuan of stimulus lending that the banks have made to duff municipal projects at Beijing's behest or capital construction loans that have gone bye-bye on high-speed rail. Yes, Miss Chu, it does indeed raise questions about what is left on bank balance sheets, particularly when administrative restrictions on lending force the banks to part with their good loans as financial products sold to select customers. Methinks Beijing may want to look a little closer to home when reading Europe and America lessons on prudent financial practices.