China is hiding $3 trillion of foreign currency in 'shadow reserves,' adding unknown risks to the global economy, former Treasury official says
Half of China's currency reserves are"hidden," a situation that may add risks to the global economy down the road, former Treasury Department official Brad Setser wrote.
A key indicator about China's reserves is a sudden pause in its reported activity. From 2002 to 2012, China's foreign exchange reserves steadily rose as the central bank bought US dollar assets to prevent China's yuan from appreciating too much, allowing exports to remain cheap. "Just as China has 'shadow banks' — financial institutions that act like banks and take the kind of risks that a bank might normally take but aren't regulated like banks — China has might be called 'shadow reserves.' Not everything that China does in the market now shows up in the PBoC's balance sheet," he said.
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