Central Banks

China central bank doesn't need to shrink balance sheet like the Fed, adviser says

Key Points
  • China central bank adviser says not in the same boat as the Fed
  • Notes balance sheet structures of Fed and PBOC vastly different
A woman walks past the headquarters of the People's Bank of China in Beijing, China.
Jason Lee | Reuters

China's central bank will not take action to shrink its balance sheet like the U.S. Federal Reserve as it does not face the same pressures due to its use of different policy tools, an adviser to the People's Bank of China said on Thursday.

The Fed is looking to start reducing its massive $4.2 trillion portfolio of Treasury bonds and mortgage-backed securities beginning later this year. Most of the assets were purchased in the wake of the 2007 to 2009 financial crisis and recession.

However, the Chinese central bank's assets are mainly foreign exchange-based, Sheng Songcheng, the former director-general of statistics and research at the central bank, wrote in the Shanghai Securities News.

"The balance sheet structures of China and the United States' are very different," he wrote in the newspaper.

"The PBOC does not have the huge portfolio of securities assets that need to be dealt with and foreign exchange accounts are impacted by capital flows, which can be hedged by adjusted other subjects," he said.

The central bank also held a neutral monetary policy, he added, while the Fed is aiming to gradually normalise ultra-loose conditions.

Sheng also said that while the Fed's balance sheet expanded rapidly during the financial crisis from less than $900 billion before 2007 to $4.5 trillion in 2014, the lender's balance sheet less than doubled in size during that period.

The Federal Reserve raised interest rates last week for the second time in three months and said it would begin cutting its holdings of bonds and other securities this year in a bid to shrink its balance sheet.

While the Chinese state bank's policy stance has also been seen as super loose since the financial crisis, China's economic stimulus has been more direct - largely coming in the form of credit extended by big state-controlled banks and increased government spending on items like big infrastructure projects.

Aggregate financing in China, which includes bank loans as well as off-balance sheet lending, surged in March and was a record in the first quarter.