China’s Central Bank Makes Even the Heroic Fed Look Like a Bunch of Amateurs

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The phenomenal credit expansion in China has taken many forms and has accomplished many phenomenal things, from building entire ghost cities to turning ambient air into a toxic cocktail. In the process, the credit bubble turned China into the second largest economy.

Some of this freshly created money has been spread around. Hence, the growing middle class. Those with significant accumulation of wealth are trying to get some of it out of China before it all blows up or before the corruption crackdown or a purge or some other business misfortune takes it all down.

In China’s state-controlled system, credit expansion is largely done by state-owned banks that have to keep lending no matter what. Then there’s the increasingly important shadow banking system. And finally, the People’s Bank of China – and no central bank is a match for it.

The chart below compares the growth of the balance sheets of the major central banks, starting in 2003, when the index was set at 100. While the other central banks – except for the ECB – kept their balance sheets nearly level between 2003 and the Financial Crisis, the PBOC’s balance sheet (top orange line) ballooned. By the time the Fed (yellow line) and the Bank of England (red line) made their moves in 2008 to bail out toppling megabanks, other financial institutions, and the largest investors in the world, the balance sheet of the PBOC had nearly quadrupled.

Note the tiny Swiss National Bank (purple line) which is desperately trying to defend its franc cap by buying euros and dollars and selling newly printed francs. It works, but for how long?

And note the Bank of Japan (green line) at the bottom. In 2003, after years of QE, its balance sheet was already relatively large, but in 2012, and particularly in early 2013, it set out on a record-setting binge, from an already large base.

central-bank-balance-sheets

No central bank – not even the Fed with its heroic efforts at the printing press – is a match for the PBOC. Its balance sheet has maintained that number one position in terms of growth since 2003. Its expansion continues unabated and with renewed vigor. It makes the heroic Fed look like a bunch of amateurs.

These balance sheets are additive, forming a multi-trillion-dollar pile of newly created money, the largest monetary experiment ever that created the greatest asset bubbles ever, to which any form of non-catastrophic exit remains elusive. But hey, no problem. Full speed ahead.

There are cracks in the veneer, however. Once soaring gaming revenues in Macau, the world’s largest gambling hub where the Chinese go to bet and funnel their money around China’s capital controls, are plunging faster than during the financial crisis. This indicator of the Chinese economy is flashing red. Read…   What the Heck is the Deal in Macau?

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  6 comments for “China’s Central Bank Makes Even the Heroic Fed Look Like a Bunch of Amateurs

  1. pogo
    Nov 18, 2014 at 8:47 pm

    Re: “It makes the heroic Fed look like a bunch of amateurs.”

    Your chart actually shows a pretty fierce competition between the PBOC and the Fed. Let’s add one more factor to this picture: How much gold does the Fed have stashed away compared to the PBOC? Answer: nobody knows for sure, but if the PBOC has been adding to its gold pile, as the inferences of the 24 hour a day conversion of gold to Asian bar requirements by Swiss refineries allow, it would cause a speculative type of person to believe that the day when gold is incorporated in a meaningful way into a new global currency system will benefit China to the detriment of the Fed.

  2. pogo
    Nov 18, 2014 at 9:18 pm

    Gold export from Switzerland to Asia: 600 tonnes

    http://marketupdate.nl/en/gold-export-switzerland-asia-600-tonnes/

  3. interesting
    Nov 18, 2014 at 9:34 pm

    until the renminbis’ peg to the dollar is removed i don’t see any way the China Currency can become a world reserve currency and what would happen if that peg was removed?

    • Robert
      Nov 20, 2014 at 12:33 am

      For years Congress was complaining that China was a “currency manipulator” (i.e., downward to protect their export markets). And so what happened? The peg was indeed changed from 8 yuan to the dollar to 6- in other words, they have positioned themselves to acquire a greater share of the world’s resource assets. Their true gold reserve may be a mystery, but to the extent it reflects “the people’s gold” they are in a position to become a reserve currency- after all, it is the Fed and not the U.S. Treasury (“the people”) who owns what we like to refer to as “our” gold, and they will not willingly share it, as in issuing currency backed by gold as was done in the days when there was no “central bank” (a phrase that was virtually a dirty word right up until the Nixon administration, when the U.S. dollar actually went off the gold standard

  4. Petunia
    Nov 19, 2014 at 8:09 am

    China doesn’t need the US anymore as a market for their production. They can absorb it and still export to Europe and Asia. They also don’t need the dollar peg. They are now a military, industrial, and financial center, thanks to the US giving away their knowledge base.

  5. Julian the Apostate
    Nov 20, 2014 at 3:54 am

    What the Chinese are doing seems to be a contradiction. But a contradiction cannot exist, ergo, one of our premises is wrong. The Chinese have always defeated their enemies by weakening them through decadence, and there is plenty of that to go around. I’ve always thought of Mao as an aberration like the Mule in The Foundation Trilogy. The PBOC has lead us all on a merry chase, and I see their gold accumulation as an anchor that will tie them down when the global financial tsunami inevitably hits. Since the rest of the central banks are clearly naked short on PMs China kills two birds with one ROC.

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