Thread by @Brad_Setser

this is a relatively straightforward BoP question --

a) there is a bit of capital flight embedded in the current account (the overstated tourism balance)
b) errors and omissions (hot money, flight capital has been roughly equal to the surplus in the basic balance since 14)

1/x

https://twitter.com/adam_tooze/status/1142809540053938179

I have written about this in the past, but in the context of explaining why the equilibrium level of intervention by China has fallen (e.g. reserve growth no longer tracks the current account surplus)

(2/x)

cfr.org/blog/why-hasnt…

in the preceding chart I subtracted errors from the basic balance, and compared it to my measure of the buildup of official assets -- the difference is recorded private capital flows (in and out) -- e.g. there was a modest net private inflow in 18

(3/x)

Here is another way of cutting the data. Cumulative reserve growth v the cumulative basic balance (CA surplus plus net FDI). There is a bit of a gap, e.g. there has been some leakage. But China also has ~ $1 trillion more in state assets than shows up in reserves.

(4/x)

Bottom line as far as I am concerned -- China's state (between the PBOC, SAFE and the big state banks) has ~ $5 trillion in assets (over $3 trillion as SAFE/ CIC, almost $2 trillion in bank assets), just under $1 trillion in liabilities

(5/x)

Chinese residents have a growing (but unrecorded) offshore asset position from the "flight capital" of the last five years (easily $1 trillion) --

and as is well known FDI inside China tops Chinese FDI abroad.

(6/x)

Bottom line: there is capital flight, but it is covered out of the goods surplus-- and the net foreign asset position of the Chinese state remains massive even if it isn't growing as fast as before.

I personally would not spin this as something all that alarming

(7/x)

There is plenty to worry about in China: notably the domestic financial system's fragilities and the ongoing inability of China to sustain its growth without rapid growth of credit and investment.

But I don't really see a case for worrying about the BoP

(8/8)