If you thought the U.S., E.U., and Japan were the only central banks printing fiat currency think again. There is new player at the table and he controls more money than Ben Bernanke.
The People’s bank of China (PBoC), China’s central bank is now the 800lb panda in terms of balance sheets. They have become the main provider of global liquidity with its total assets topping 28 trillion yuan (about $4.5 trillion dollars). By comparison, the Federal Reserve’s balance sheet is a paltry $3.5 trillion dollars.
This makes the PBoC’s governor, Zhou Xiaochuan, in charge of the largest pool of money on earth. He is now controlling more money than Ben Bernake. These two combined are a global tag team of liquity spraying money all over the world’s economic system.
The PBoC has seen a 118 percent rise over the past five years in its balance sheet. China’s broadest measure of money supply, M2, was up 146% over the past five years to 85.2 trillion yuan (13.8 trillion dollars) by the end of 2011 and China alone accounted for 52% of the world’s new M2 in 2011.
China’s central bank balance sheet is astonishingly high considering China’s GDP is roughly only half the size of the U.S. economy. This high speed money printing express is the result of China trying to peg their currency artificially low and at the same time spend hugely on infrastructure projects to boost the economy.
Now China has awoken with a hangover and we are left with the unintended consequences. The banks and local governments are stuck with bad debts, we have extremely high inflation, and a growing wealth disparity.
Inflation has required China to slam on the brakes of its economy. Commercial loans in China are now running 9% if you can get one. They have also put in draconian measures to curb property and housing speculation. This is the real reason why China is slowing down not the reported weakness in export markets. China is trying to engineer a slow down to soak up all of the liquity in the system.
Try making money on an industrial business with your cost of capital at 9%—it's not easy.
Bad debts are found throughout the Chinese banking system as well as local governments. The good news is that Chinese banks are the most profitable in the world and are borrowing at 5% and lending at 9%. They can work through their bad debts and if they can’t, Beijing has a $3 trillion dollar reserve to back them up.
The last point with regards to wealth disparity is a very sensitive flash point in China. As recently reported in the China Money Report there are now 90 billionaires (in dollar terms) living in Shanghai alone. The money doesn’t stop there. It was also reported there are now over 140,000 people in Shanghai alone with a net worth over $1.5 million USD. The working people meanwhile are getting 15% annual wage increases but it cannot keep up with the rise in prices. Tomato prices in 2012 are up 70%, vegetable prices are on average up 30%. You can almost feel the scourge of a heavy and sustained inflation setting up camp with intentions for a decade long sleep-over.
China does not face a hard landing yet; there is a much greater risk of overheating. China is a commodity-importing juggernaut, they could cure inflation and boost the economy by allowing the yuan to appreciate and stop the global money printing roller coaster, but will they? Thus far, they refuse to let it appreciate much and have continued to choose liquidity and money printing.
How much more will Zhou Xiaochuan print?