China’s State Administration of Foreign Exchange (SAFE) ended 2013 with $US3.82 trillion in assets under management (AUM).
SAFE is the organisation that is responsible for governing the foreign exchange market and managing Forex reserves.
Stephen Green at Standard Chartered thinks in 2014 China will continue to see capital inflows, a current account surplus of $US394 billion (3.6% of Chinese GDP and 0.5% of global GDP). And, that the People’s Bank of China (PBoC) will intervene
“If our BoP forecasts for 2014 are correct, and banks continue to sell the dollars that they buy from corporates, SAFE will end 2014 with USD 4.4tn,” Green writes. “In other words, 2014 is likely to be the year when China’s BoP re-emerges as a problem for both China and the world.”
So why is all of this a problem?
In the past China’s current account surpluses and Forex reserves have been seen as part of Beijing’s efforts to keep the exchange rate from appreciating.
If China’s Forex reserves did climb to $US4.4 trillion and we did see the current account surplus rise, “I think that’s a disaster for the global economy,” Patrick Chovanec of Silvercrest Asset Management told Business Insider. “I think it leaves China more exposed to currencies it doesn’t control.”
“Why should a developing country with one-tenth the per capita GDP of Japan be lending its purchasing power to developed countries? In terms of a standard of living, quality of life issue it makes no sense. If it happens, it’s a terrible failure of rebalancing.”
It also doesn’t bode well for the global economy. “It means that the world is that much more starved for demand and that much more flushed with capital. And it tries to preserve the exiting imbalance, which whether it’s today, or tomorrow, or the next year, unsustainable,” Chovanec said.
Of course we have to remember that it’s hard to tell the true nature of inflows because it’s hard to read trade data where we’ve seen over-invoicing.
As for the central bank, late last year PBoC deputy governor Yi Gang said “it’s no longer in China’s favour to accumulate foreign-exchange reserves. …The marginal cost of accumulating foreign reserves has exceeded marginal gains.”
Here’s a chart that shows the trajectory of China’s external imbalance:
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