Are China’s US$3 trillion reserves an economic curse?
Central bank should stop drip feeding cash into the economy, fuelling asset price bubbles and wayward investment, government adviser says
China’s US$3 trillion foreign exchange reserves managed by the central bank have been a major source of the country’s financial problems, according to a government economic adviser.
Huang Qifan told a forum organised by the Chinese news organisation Caixin on Thursday that the People’s Bank of China had been releasing too much cash into the economy, leading to financial risks and asset price bubbles.
Huang, a former mayor of Chongqing who survived a political storm in the city after his former boss Bo Xilai was toppled in 2012, is now a deputy director on the financial and economic committee at the National People’s Congress, a largely advisory role to the government.
Beijing should entrust its finance ministry to manage foreign exchange reserves and let the central bank focus on making independent monetary policy, said Huang, one of China’s most outspoken economic bureaucrats.
Whether Huang’s controversial advice will be heeded by China’s policy decision makers is unknown, but it comes amid a debate over the causes of financial risks in the country’s economy.
Chinese President Xi Jinping has listed financial risk control as a top priority, but efforts to contain risks such as soaring debt levels have largely been restricted to clampdowns on corrupt officials and tycoons, plus tackling shadow banking.
Institutional problems have largely been ignored and Huang said China needed to go deeper.
“The forex reserve system is the primary source of many of China’s problems,” he said.
The 65-year-old stepped down as mayor of Chongqing at the end of last year.
Before the downfall of Bo – who was jailed for life for corruption in 2013 – Huang said he worked with the former Chongqing Communist Party chief like “a fish and water”.
Huang also worked with a successor of Bo’s, Sun Zhengcai, in Chongqing. Sun, a high-flyer, was placed under investigation for alleged corruption in July and expelled from the party in September.
Huang is viewed as a capable economic management technocrat who engineered rapid economic expansion in Chongqing, a municipality of 30 million people, on the Yangtze River.
He regularly comments on economic issues ranging from the property market to international business strategies.
Huang said forex reserve investment under central bank management was unproductive as it focused on low-risk liquid assets such as treasury bills.
This, he said, fell exactly into the problem of “Capital Doubtful Recycling”, a term coined by Nobel Economics Prize winner Joseph Stiglitz to describe the phenomenon of emerging markets buying low-yield bills with hard-earned reserves.
The People’s Bank of China now manages the world’s largest forex reserves, which stood at US$3.1 trillion at the end of October, despite its misstep in shifting towards a more flexible yuan exchange rate system in August 2015, costing hundreds billion dollars of hard-earned reserves to prop up the value of the nation’s currency.
“The real meaning of building a financial power is to reap high returns during its global investment,” Huang said.
Beijing does not release its forex investment portfolio and returns, but US Treasury department data showed its holdings of US treasury bills, excluding holdings by proxy, was the world’s largest at US$1.18 trillion by the end of September.
The central bank’s forex management had had an impact on domestic monetary policy and led to a series of financial mess, Huang said, adding that the finance industry’s share in the economy was too large and China’s money supply volume was too big.
As China’s broad money supply, M2, was twice as large as the country’s GDP size, it has driven property prices to rise eight-fold in the past decade and inflated the amount of large expenditure off company balance sheets.
China’s finance ministry was better placed to invest reserves, Huang said.
“If the finance department can issue special bonds to manage forex reserves … it could generate several hundred billions in gains each year,” he said.
Beijing set up its flagship sovereign wealth fund China Investment Corp 10 years ago, with a special bond issuance by the finance ministry. Through active investment, including private equity and commodities, the fund has grown to US$900 billion from US$200 billion, with annualised overseas investment returns of 4.6 per cent.
Changes could allow the central bank to be free to concentrate on monetary policy, an important condition for China to build the yuan into a currency for international settlements, reserves, investment and to become an anchor of global currencies, Huang said.
Unlike his American counterpart Janet Yellen at the Federal Reserve, Zhou Xiaochuan, who has served as central bank governor for 15 years, holds far less power in deciding monetary policy.
Instead, the central bank forms part of the State Council and it needs to coordinate with other ministries to implement monetary policies.
This has led Zhou to be criticised over the years for “printing money”, especially during China’s 4 trillion yuan government stimulus package in 2008 to bolster economic growth.