PBOC’s balance sheet is doing the opposite of what the Fed’s is doing20 September, 2012, 18:47. Posted by Zarathustra
Earlier, we pointed out that among major central banks, the Fed’s balance sheet is actually the smallest relative to the size of the economy, while ECB’s balance sheet is growing remarkably quickly. And of course, the Chinese central bank’s balance sheet is actually larger than any others’.
But the one thing which really struck us is not the actual size of PBOC balance sheet relative to the size of the Chinese economy. Rather, it is the fact that PBOC balance sheet-to-GDP ratio has actually declined quite sharply, especially since last year. This is totally opposite to the trend one is now seeing with central banks in other major developed economies.
The chart below better visualises the point. It also shows the year-on-year percentage-point change of the PBOC balance sheet-to-GDP ratio.
Source: People’s Bank of China
It comes back again to the point that because PBOC’s foreign assets accumulation has more or less stopped since late last year largely because of larger and persistent money outflow, the size of PBOC’s balance sheet has remained almost unchanged for almost a year now, while the economy is still growing, albeit at a slower rate. The result is simple, that the ratio of the size of balance sheet to the size of the economy decline.
The developed world’s central banks are increasing the size of their balance sheets (both in absolute terms and relative to the size of their economies) in order to ease monetary policy at zero bound. The fact that PBOC’s balance sheet has stayed almost constant for a year now and that it is shrinking relative to the size of the Chinese economy means that not only is PBOC not easing at all, monetary condition has probably been tightened inadvertently. Of course, there are still tools to offset such impact, such as “un-sterilised” the previously sterilised inflow by cutting RRR or deploy even more reverse repo. However, we maintain that if outflow gets really bad, there are limits as too how much these tools can help to offset the tightening of liquidity.
With QE-Infinity, there is some hope that money will once again be encouraged to flow into China. If money inflow is successfully encouraged, it could help PBOC to ease monetary condition, which could possibly be too tight at the present moment. However, any positive impact could well be short-lived, and it could well be fading already.