China has $3 trillion hidden currency reserves: What this ex-Biden admin trade advisor says about Asian giant's economy

China, the world's second-largest economy, is said to have a staggering $3 trillion in “shadow” currency reserves, doubling the official records, according to US economist Brad Setser. He wrote about the ‘shadow reserves, in New York City based news platform The China Project. The People's Bank of China's (PBOC) records show $3.1 trillion in foreign exchange reserves, but Setser argues that an equivalent amount is hidden in entities such as state commercial lenders and policy banks, bringing the total reserves to a substantial $6 trillion. 

The presence of these “hidden” reserves paints a different picture of China's financial strength, putting its global creditor position into a new perspective. However, the lack of transparency surrounding these shadow reserves raises concerns about potential risks to the global economy, and calls into question the dominance of the dollar. 

“China’s lack of transparency here is a bit of a problem for the world. China structurally is so central to the global economy that anything it does, seen or unseen, will eventually have an enormous impact on the rest of the world,” Setser wrote. 

China’s hidden reserves mechanism

State banks are central in concealing these shadow reserves, which are reported to be significant and almost equal to China’s formal foreign exchange reserves. These substantial, undisclosed reserves underscore China has substantial position as a global creditor, and play a vital role in funding major initiatives like the Belt and Road Initiative.

The State Administration of Foreign Exchange (SAFE) is known to have transferred funds to state banks through swaps before the global financial crisis. These hidden reserves highlight China's capacity to generate reserves, despite reported reserve shrinkage.

These currency reserves are not included in the official records of the People's Bank of China (PBOC) and are instead held by entities like state commercial lenders and policy banks, added Setser, who had previously served as the US Trade and Treasury advisor in the Biden administration.

Global economy at risk?

The existence of these “shadow reserves” poses a unique risk to the global economy. The lack of transparency raises concerns about China's significant global impact. Critics argue that improved disclosure is necessary, as the true extent of SAFE's foreign currency assets remains uncertain.

The dominance of the dollar

The discovery of China's hidden reserves comes at a time when the global dominance of the dollar is being questioned. Countries, especially those within the BRICS group (Brazil, Russia, India, China, and South Africa), are seeking ways to decrease their dependency on the US dollar. The BRICS nations are exploring the possibility of creating a joint currency to reduce their reliance on the dollar. Despite challenges, their commitment to policy innovation and coordination signals a momentum of de-dollarization efforts.