Chart: Emerging market central banks’ FX reserve accumulation and credit growth5 June, 2012, 11:31. Posted by Zarathustra
The Bank of International Settlement published the quarterly review along with a few special reports. One of the special features discusses the expansion of central bank balance sheets in emerging markets. The study confirms more or less what we have been saying regarding to emerging market, particularly for China. It is the foreign exchange intervention that is the main driver behind the growth in foreign exchange reserve, that that leads to inevitable expansion of money supply and credit growth.
The left-hand panel of the chart below taken from the report confirms this point, as you can see that China is on the far top right hand corner. The right-hand panel looks equally worrying for emerging market, that they seemed to have been more than willing to extend US dollar loans without US dollar deposit base.
From the report:
Some evidence on credit growth from the region may be consistent with such dynamics: the rate of credit growth has been rapid in several economies where foreign reserves have also grown rapidly, particularly China and India (Graph 7, left-hand panel).
The US dollar exposures of emerging Asian banks also display a worrisome trend consistent with a credit boom. These banks have been very active in extending US dollar loans without a corresponding increase in US dollar deposits in recent years (Graph 7, right-hand panel). The willingness of central banks to resist currency appreciation appears to have encouraged private banks to take on additional foreign exchange rate risks (in the form of either currency mismatch risks or – if the banks swap out the foreign exchange rate risk in financial markets – counterparty risks).