Back in December, 2011, I wrote about the insane leverage ratio at the People’s Bank of China.
The post generated a lot of buzz, but no one could actually answer the
question of what happens when a central bank becomes insolvent.
We might get an answer to that question quicker than we
expected. At current exchange
rates, it will be one of the most expensive lessons in history.
When I wrote the original post, the chart looked like
this. The trajectory of the ratio
meant it would pass 1400 in a few months.
Today, it looks like this. Usually, when excessive leverage is involved, it is never a
good thing (for the institution) when the amount of assets flat lines, or even
slows down.
The People’s Bank of China’s balance sheet has definitely
shown a noticeable slowdown. In
the past, its balance sheet had the amazing ability to increase by a trillion renminbi
every few months. The current
balance seems to be stuck at around ¥28 trillion, which it passed in July,
2011. It broke through ¥29
trillion in January, but then fell back into the ¥28 trillion range. For our purposes, we can say that it
will take over 11 months for the PBoC to add another trillion renminbi to its
balance sheet. The last time it took
the PBoC 11 months to add one trillion renminbi to its balance sheet was way
back in 2002, so times have changed.
Remember, the PBoC had ¥28.6 trillion in assets at the
end of June, 2012, but only ¥22 billion in capital. If its assets decrease by ¥22
billion (or -0.07%), it is insolvent.
Since peaking out in January, 2012, the PBoC’s balance sheet has lost ¥895
billion, so maybe it already is.
Maybe nothing bad will happen.
After all, who needs shareholders equity when you can print money?
