New risk: China has $3 trillion of ‘hidden’ currency reserves, says US economist

Virendra Pandit 

New Delhi: In a sensational report, a former US Trade and Treasury official has disclosed that China is sitting on a pile of USD 6 trillion, half of which is “hidden”, that can present a new kind of risk to the global economy.

A lot of the Asian country’s foreign-exchange reserves don’t show up in the official books of the People’s Bank of China, Brad W. Setser, a former Biden administration trade advisor, wrote in a report on The China Project, a New York-based news platform.

Instead, what can be called “shadow reserves” appear among the assets of entities such as state commercial lenders and policy banks, the American economist said.

While officially revealed reserves have flat-lined over recent years, the “hidden” variety might have pushed higher alongside China’s export surplus.

“China’s lack of transparency. Here is a bit of a problem for the world,” Setser, wrote. “China structurally is so central to the global economy that anything it does, seen or unseen, will eventually have an enormous impact on the rest of the world.”

An example of the influence China’s reserves can have is their role in funding the country’s Belt and Road Initiative (BRI), which stemmed from a post-financial-crisis push to diversify holdings, he said.

“They are powerful enough of an economic force such that an entire, global, decades-long infrastructure plan was in some ways, just a side effect of a 2009 decision to find new ways to manage China’s foreign exchange,” he wrote.

“Well, China is so big an economy – and such an unbalanced economy – that all its activities just have an outsized global impact.”

Chinese institutions reporting to Beijing probably have around USD 6 trillion in foreign assets. That compares with the USD 3.1 trillion in official reserves the State Administration of Foreign Exchange reported at the end of last year, he said.

Currently, Setser is a Senior Fellow at the Council on Foreign Relations, a New York-based think tank.

The scale of these hidden reserves “highlights an important fact that is often forgotten amid all the talk of China’s domestic debt problems,” he wrote.

“Globally China is still a massive creditor, and the weight of China’s massive accumulation of foreign exchange is still felt around the globe.”