A smaller-than-usual increase in China’s foreign-exchange reserves last quarter has created a bigger-than-usual controversy. The increase in foreign reserves, at $40.44 billion for the fourth quarter, was significantly smaller than the $132.33 billion in recorded trade and investment flows. So something strange is going on.
But some very distinguished analysts of the Chinese economy have questioned this scenario, among them Nicholas Lardy of the Peterson Institute of International Economics in Washington. They point to the fact that the scale of the implied outflows, around $100 billion, is very similar to the size of the official bailout of the Agricultural Bank of China, or ABC. The bank was freed from 818 billion yuan (about $120 billion) of bad loans in an official transaction announced at the end of October, and apparently completed in November. Coincidence? Probably not, is Mr. Lardy’s view, given that China has in the past used its foreign-exchange reserves to clean up bad loans at its state-owned banks.
That would mean that China’s recent pattern of huge reserve accumulation and upward pressure on its currency has not in fact changed. “If official reserves were used to clean up ABC’s balance sheet, then it would be the case that official intervention in the foreign exchange market was much greater than suggested by the modest increase in reserves,” Mr. Lardy writes in a post on his institute’s blog.
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