China has risen to tremendous prominence in the financial world since its membership in the World Trade Organization in 2001. It implements a form of “social financing” driven by state-owned banks, the official, regulated lenders of China.
Unsurprisingly in a controlled economy, China’s commercial bank lending activities are remarkably stable. But wide swings in China’s total liquidity are driven by its “shadow banks.” The Chinese shadow banks liquidity flows are frequently anti-cyclical, which may indictate a preference to operate outside monetary controls. China’s shadow banks tend to be funded through wholesale money and capital markets and (like shadow banks everywhere) are dependent on buoyant collateral values.
China’s central bank, the People’s Bank of China (PBoC), unabashedly implements the coordinated economic policy of the Chinese government.
With a $6 trillion exposure to US assets, including over $1 trillion in US bonds, China has tied its economy to the United States, for better or worse. Thus proclamations are issued weekly that China intends to reduce its dependence on the US dollar and the US financial markets. But the fact remains that China has a huge developing economy, with a weak, under-developed financial system. Left without alternatives, China remains closely tied to the US financial system, in spite of its own wishes.
With its widely-advertised belt and road initiatives, it appears that China is creating a RMB-driven regional economy for itself and its neighbors. So, as China continues to import US dollars from all corners of the world, its export initiatives are more modestly tied to regional development centers.
Even still, China has become the bellweather for emerging economies, particularly those in Asia. The prevailing view, until very recently, was that investment opportunities in China and the East abound. But by Q4, 2023, much investor optimism around China has diminished, as investment flows into that country have slowed–and nearly reversed. At this important pivot point, it is too early to foresee the impact of these diminished investment flows.