Tuesday, November 23, 2010

Is The PBOC Easing?

On Friday the People's Bank of China raised its reserve requirement ratio for the fifth time this year and last month the PBOC raised interest rates for the first time in three years. China is trying to tap lightly on the brakes to keep rising inflation--mostly through food prices-- in check. Yesterday morning in his must read letter, Dr. Ed Yardeni argues that China is offsetting its monetary tighten with its own QE program. Those tricky Chinese...

"My analysis of the PBOC’s balance sheet shows that China’s central bank continues to more than offset these recent tightening moves with quantitative easing (QE). The Fed has gotten all the recent attention and criticism for its second round of QE. The PBOC has been the world’s champ of QE for years! If we define QE as Large Scale Asset Purchases (LSAP) by a central bank, the PBOC has been aggressively pursuing this policy by increasing its holdings of foreign exchange assets without offsetting them by selling domestic assets. Let’s review:

(1) From January 2001 through September of this year, the PBOC’s assets increased $3.2tn to a record $3.7tn, led by a $2.7tn increase in foreign exchange holdings to a record $2.9tn.

(2) During September, foreign exchange accounted for 78.5% of the total assets of the PBOC, up from 37.5% at the start of 2001.

(3) On the liability side of the PBOC’s balance sheet, “deposits of financial institutions,” a.k.a. bank reserves, rose from just $159.4bn during January 2001 to a record $1.7tn during September (Figure 33). These are almost all required reserves, and have been amply provided by the PBOC to fund the huge expansion in China’s M2 and bank loans."

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