Global Head of Research, Smartkarma

Mark Artherton

Global Head of Research

LR Research

Macroeconomics

<p>China has seen its foreign exchange reserves decline by almost a trillion dollars over the past couple of years.  These reserves sit on the People's Bank of China's (PBoC) balance sheet as assets, therefore one might expect such a large asset drop to lead to a shrinking PBoC balance sheet.  However, after initially dropping the PBoC has followed a different course more recently.  We believe that this course of action is entirely consistent with Quantitative Easing (QE) and the PBoC being a key actor in the reflation of the Chinese economy.  Investors should focus less on interest rates and much more on the PBoC's discretionary actions.  The PBoC's role in the Chinese economy is rapidly changing from that of an FX hoarder to being a key financing intermediary. Rather than pursuing a liberalising agenda this is financial 'reintermediation'. </p>

China has seen its foreign exchange reserves decline by almost a trillion dollars over the past couple of years.  These reserves sit on the People's Bank of China's (PBoC) balance sheet as assets, therefore one might expect such a large asset drop to lead to a shrinking PBoC balance sheet.  However, after initially dropping the PBoC has followed a different course more recently.  We believe that this course of action is entirely consistent with Quantitative Easing (QE) and the PBoC being a key actor in the reflation of the Chinese economy.  Investors should focus less on interest rates and much more on the PBoC's discretionary actions.  The PBoC's role in the Chinese economy is rapidly changing from that of an FX hoarder to being a key financing intermediary. Rather than pursuing a liberalising agenda this is financial 'reintermediation'. 

The Mystery of the PBoC's Growing Balance Sheet