Guan Tao

  Recently, the People's Bank of China disclosed to the public that it plans to hand over a trillion-dollar balance of profits to the government, which will be used for tax refunds and increased transfer payments to local governments.

  This is an important measure to implement what Premier Li Keqiang mentioned in this year's government work report, that certain state-owned financial institutions and specialized institutions should hand over the profits they have accumulated in recent years in accordance with the law, so as to ensure that the deficit ratio is reduced but the intensity of fiscal expenditure remains unchanged.

It is reported that this part of the central bank's balance profit mainly comes from the investment income of foreign exchange reserves in the past few years.

What kind of financial impact will this part of the income be turned over will have, this article intends to analyze it from the perspective of the central bank's balance sheet.

  foreign exchange reserves

  investment income included

  At present, the People's Bank of China publishes the balance of foreign exchange reserves on a monthly basis, and the foreign exchange bureau publishes the changes in foreign exchange reserve assets caused by transactions on a quarterly basis in the balance of payments. The latter excludes the valuation impact caused by changes in exchange rates and asset prices.

  Among them, the change of foreign exchange reserve assets caused by transactions includes three parts: one is the change in the scale of foreign exchange reserves caused by the intervention of the central bank in the foreign exchange market; the other is the investment income of foreign exchange reserves. "Investment income" is positive, debit "change in foreign exchange reserve assets" is negative; third, changes caused by other transactions, such as the use of foreign exchange reserves as entrusted loans or policy capital injection, cause official foreign exchange reserves to decrease, while the central bank's balance sheet "Other foreign assets" increased.

  Reserve investment gains are reflected in the central bank's balance sheet

  The relevant person in charge of the Ministry of Finance explained when the PBC turned over the reserve investment income according to law, and pointed out that according to the "People's Bank Law", the PBC's net profit after deducting expenditures from revenue in each fiscal year and withdrawing the total reserves according to the approved proportion, all turned over to the central finance.

After the outbreak of the epidemic in the century, in order to cope with possible risks and challenges, the turn-over of profits was suspended in case of urgent needs.

As a result, the relevant institutions have formed some balance profits to be turned over. This time, in order to implement the new combined tax and fee support policy, after approval according to the procedures, they are arranged to turn over part of the balance profits formed before 2021.

  It can be seen that, in the past, according to the usual practice, the central bank will turn over the investment income of foreign exchange reserves to the central finance after annual accounting.

When the domestic transfer is made in RMB, it is reflected as the change in the central bank's "foreign exchange holdings" (that is, the change in "foreign assets: foreign exchange").

For example, in 2010, the foreign exchange reserve assets and the central bank's foreign exchange holdings increased by 469.6 billion US dollars and 3.16 trillion yuan respectively, equivalent to 1 US dollar of new foreign exchange reserve assets, which required an increase of 6.73 yuan in foreign exchange funds. The central parity rate of 6.77 deviated by only 0.5%.

For another example, in 2013, the foreign exchange reserve assets and the central bank's foreign exchange funds increased by 432.7 billion US dollars and 2.76 trillion yuan respectively. The equivalent of 1 US dollar of new foreign exchange reserve assets requires an increase of 6.38 yuan in foreign exchange funds. The central parity rate of the RMB exchange rate of 6.19 deviated by only 3.0%.

  It is only one of the means to reserve policy space in recent years, the central bank's reserve investment income has not been turned over according to the law on an annual basis.

For example, in 2021, the foreign exchange reserve assets and the central bank's foreign exchange holdings will increase by 146.7 billion US dollars and 155.9 billion yuan respectively, equivalent to 1 US dollar of new foreign exchange reserve assets, and 1.06 yuan will be required to increase foreign exchange holdings. The central parity rate of the exchange rate is 6.45.

This shows that changes in foreign exchange holdings cannot fully reflect changes in newly added foreign exchange reserve assets.

  However, since it has been reflected in the foreign exchange reserve assets announced by the central bank, it will be reflected on the central bank's balance sheet.

According to the accrual basis and the principle of accounting and bookkeeping, the central bank records the increase in "other assets" on the asset side, and the increase in "other liabilities" on the liability side (the central bank's profit to be turned over to the finance) ( see table to the right).

  This time, the central bank will turn over part of the investment income of the reserves to the government, and the transfer and use in RMB will not reduce the scale of foreign exchange reserves, and there is no "secondary foreign exchange settlement" to increase the scale of foreign exchange reserves, but only structural adjustments that have been recorded.

This will not affect the total amount of the central bank's balance sheet, so it will not cause fiscal overdrafts to the central bank, nor will it increase additional taxes or burdens on economic entities.

Before the "8.11" exchange rate reform in 2015, there was a "double surplus" in the balance of payments, foreign exchange reserves continued to increase, and the RMB exchange rate appreciated. Some people felt that having too much foreign exchange reserves was a burden. For social welfare such as pension, medical care, education, etc., these all involve the free distribution and use of foreign exchange reserves, which are financial overdrafts to the central bank.

After the reserve investment income is turned over to the government, the government can completely decide in the budget whether to use it for social welfare purposes, and this does not involve financial overdraft to the central bank.

  This reserve investment income is turned over

  Fiscal will affect market liquidity

  As mentioned earlier, the central bank will hand over trillions of surplus profits, including investment income from reserves, to the government, which will be used for tax rebates and increased transfer payments to local governments.

In the process of withdrawing and using RMB, although there is no "secondary settlement" to expand the central bank's balance sheet, it will affect the structure of the central bank's balance sheet.

  From the perspective of assets, the central bank turns over the reserve investment income, which will reduce the central bank's "other assets" balance and increase the "foreign exchange" investment accordingly.

From the perspective of liabilities, after the finance receives the turned-in profits, it will reduce the balance of "other liabilities" of the central bank.

After that, if the finances are not used in time, the "government deposits" will be increased, which has no impact on market liquidity; if the finances are spent in time, tax refunds have been processed for enterprises or used in the "three guarantees" at the grass-roots level, it will become Business or household deposits increase the balance of the "reserve currency" (ie base currency), thereby increasing market liquidity.

  Some people liken this to a 50BP cut across the board.

This analogy isn't quite accurate.

Because the comprehensive RRR reduction is a deep release of medium and long-term funds, it affects the currency multiplier rather than the total amount of the base currency.

The aforementioned operation is to directly expand the base money supply, and the impact on the money multiplier is uncertain, although the final result is reflected in the changes in the broad money supply M2.

Calculated based on the rolling average currency multiplier over the past 12 months, after the 1 trillion yuan of surplus profit is turned over to the government, if it can be used, M2 will increase by 7.23 trillion yuan, and by the end of the year, M2 will increase by 3.0 percentage points.

  This operation will not only provide cash flow support in real money to enterprises and households, but also influence the trend of market interest rates by affecting liquidity and reduce the financing cost of the real economy.

Of course, the central bank also made it clear that the balance of profits will be handed over on a monthly basis to keep the balance sheet of the People's Bank of China basically stable, which will also help reduce the volatility of market liquidity.

This measure reflects the coordinated linkage of monetary policy and fiscal policy to jointly stabilize the macroeconomic market.

  To sum up, from the perspective of financial impact, firstly, this time the central bank turns over the balance of profits in RMB, which will not reduce the scale of foreign exchange reserves; "Foreign exchange settlement" will neither increase the scale of foreign exchange reserves nor cause the central bank to "expand its balance sheet"; thirdly, this turn-over will increase the supply of "base currency" from the liability side, and increase liquidity support for the real economy, but it will not increase the liquidity of the real economy. The increase of "foreign exchange" on the terminal does not mean that the central bank has resumed foreign exchange intervention, nor does it represent a new change in the supply and demand of spot foreign exchange; fourth, the surplus profit that should be turned over to the central government in accordance with the law does not belong to the central bank. Overdraft is not the practice of modern monetary theory.

  (The author is the global chief economist of BOC Securities)

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