Today came the news that despite inflationary pressure, the Chinese government continues to subsidize its export sector via massive accumulation of foreign currency reserves:
China’s foreign exchange reserves, already the world’s biggest, soared again in the second quarter, adding to inflationary pressure and highlighting the risks in Beijing’s policy of holding down the value of its currency. Reserves are a key indicator of central bank intervention in the currency market because they reflect how much foreign exchange it has purchased in order to stabilise the renminbi. After jumping $197bn in the first quarter, reserves were up another $153bn in the second quarter.
The first-best response would be for China to stop doing this. China has a inflation problem and the United States has a depressed jobs and output problem. If China allowed its currency to appreciate more rapidly and accumulated fewer foreign currency reserves, that would help solve both problems.
That said, it also seems clear that interest group politics inside the PRC militate against them reducing these kind of subsidies. So at a minimum, let me suggest that they should do something wackier with their money. For example, Chinese people are known to be basketball fans. I saw people lining up for Bruce Bowen’s autograph. At the same time, the owners of NBA franchises are refusing to pay professional basketball players to play basketball. Based on TrueHoop’s salary data, the PRC could hire all the NBA players at their current salaries for something like $1.5 billion. That’s a lot of money, to be sure, but it’s less than one percent of what the People’s Bank of China is spending per quarter on foreign exchange purchases. It’s true that the PBOC is accumulating assets with resale value, but everyone knows that China is going to take meaningful capital losses on these investments. By contrast, hiring the entire NBA would reinforce the image of a rising China in contrast to America’s hapless fading superpower.
Alternatively, if the PBOC insists on only purchasing dollar-denominated investment assets, they could buy all 30 NBA teams for something like $11 billion. This would obviously be a much less liquid investment than China’s typical moves. But it’s a pretty trivial amount of money compared to the total, and a large sovereign like China can afford some illiquid investments. What’s more, by purchasing the NBA and ending the lockout, China could obtain some much-needed soft power.