The Myth of China’s Giant Fiscal Deposits
There is a recurring notion that pops up every now and then that the Chinese government has a giant rainy day fund. When growth slows but banks are constrained in expanding lending, analysts start to call on China to tap into these reserves to finance fiscal stimulus.
Macquarie: “Running down PBC [People’s Bank of China] bills rather than cutting the RRR [required reserve ratio] is a reasonable strategy for 2012. It will be less relevant for 2013 and beyond, simply because by then the stock of PBC bills won’t be large. But there is another option: Beijing can offload the roughly Rmb3trn sitting in government deposits at the PBC. One way for this to occur is through a spending spree.”
Reuters: “The release of some 1.2 trillion yuan of fiscal deposits in December signals how roomy China's policy pockets are…. The implications of China's fiscal strength are crucial for money markets. An outflow of government deposits from the balance sheet of the People's Bank of China (PBOC) can boost systemic liquidity far in excess of an RRR cut.”
This so-called rainy day fund shows up in two locations, on the People’s Bank of China’s balance sheet as “Government Deposits” and in the Sources and Uses of Funds (Chinese language) as “Fiscal Deposits” (财政性存款).
What’s in these accounts and can it be used as a piggy bank to tap into when times are tough? The accounts are composed of local government deposits, central government deposits, and government deposits at commercial banks.
The local and central government deposits are primarily composed of excess revenues and net bond receipts. Looking at the chart above, you can see that these funds tend to build up during the year and then are rapidly spent down in the last few months.
The 2 trillion renminbi or so that remains is largely made up of the government deposits at commercial banks. These accounts are overwhelmingly composed of social security funds, but also include some capital formation funds, subsidy policy funds, and bond receipts.
The buildup of these accounts is the result of the large annual surplus of social security funds. Check out Nick Lardy’s new book for a detailed discussion of the buildup of social security funds. The chart below shows the extent to which payment into the social security system have rapidly outstripped payments to beneficiaries.
For a country facing a rapidly aging population, it makes perfect sense for China to build up its social security reserves now in anticipation of future obligations. One could even be worried that China isn't doing this quickly enough given the large amount of unfunded pension liabilities the country is facing.
These funds, however, do not represent a piggy bank or rainy day fund that the Chinese can utilize during economic downturns. Woe to the government official in China who approves dipping into money designated for pensioners’ benefits.
Government deposits are primarily composed of soon-to-be-spent revenues and social security funds. These deposits cannot serve as a magic bullet to be used during hard economic times.