bw presentation shih 040811

8/6/2019 BW Presentation SHIH 040811

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High Wealth Concentration, Porous ExchangeHigh Wealth Concentration, Porous Exchange

Control, and Shocks to Relative Return:Control, and Shocks to Relative Return:

’’

ReserveReserve

Victor ShihVictor ShihAssociate Professor of Political Science,Associate Professor of Political Science,

or wes ern n vers yor wes ern n vers y

Presentation at the INET Conference, BrettonPresentation at the INET Conference, Brettonoo s,oo s,



How Fra ile is China’s FX Reserve?How Fra ile is China’s FX Reserve?

With 3 trillion dollars in its FX reserve and capitalWith 3 trillion dollars in its FX reserve and capital,,

capital flightcapital flight

This enormous FX reserve has formed aThis enormous FX reserve has formed a

backbone to Chinabackbone to China’’s state capitalism by helpings state capitalism by helpingstate banks recapitalize time and againstate banks recapitalize time and again

et, na s vu nera e to t ree structura actorset, na s vu nera e to t ree structura actorsof capital flightof capital flight

–––– Porous capital control through current accountsPorous capital control through current accounts

–– Extremely high concentration of wealthExtremely high concentration of wealth



Why is the concentration ofWhy is the concentration ofweawea mpor anmpor an

The wealthy elite has the greatest capacity toThe wealthy elite has the greatest capacity too a n n orma on on re a ve re urnso a n n orma on on re a ve re urns

The wealthy elite has the greatest capacity toThe wealthy elite has the greatest capacity tomove wealth in and out of the countrmove wealth in and out of the countr

This small handful of households are also moreThis small handful of households are also morelikely to coordinate to move capital than thelikely to coordinate to move capital than thegenera pu cgenera pu c

The greater the concentration of wealth in theThe greater the concentration of wealth in the

million households), the more wealth reallocationmillion households), the more wealth reallocationby this small group can affect the FX reserveby this small group can affect the FX reserve



Three Approaches to Estimate theThree Approaches to Estimate theea o e opea o e op

survey data (SSB, Wangsurvey data (SSB, Wang XiaoluXiaolu)) data on large share holders of listed companydata on large share holders of listed company

((HurunHurun))

a a on e o a nanc a an rea es a e asse sa a on e o a nanc a an rea es a e asse sin Chinain China–– CMB annual re ort reveals that to 1.54% de ositorsCMB annual re ort reveals that to 1.54% de ositors

hold 45% of deposits and 67% of managed assetshold 45% of deposits and 67% of managed assets

The results range between 2 trillion USD (surveyThe results range between 2 trillion USD (surveyestate approach)estate approach)



Wealth Reallocation and the Impact onWealth Reallocation and the Impact on

’’ vv

Estimated 20% 30% 40% 50%

Total Wealth Reallocation Reallocation Reallocation Reallocation

Grey and

Official

Income

Approach

(bln USD)

Amount (bln

USD)

Share of FX

Reserve

Amount (bln

USD)

Share of FX

Reserve

Amount (bln

USD)

Share of FX

Reserve

Amount (bln

USD)

Share of FX

Reserve

1970 394 0.14 591 0.21 788 0.28 985 0.35

2610 522 0.18 783 0.27 1044 0.37 1 30 5 0 .4 63290 658 0.23 987 0.35 1 3 1 6 0 . 4 6 1 64 5 0 .5 8

Hurun

Approach

4500 900 0.32 1 35 0 0 .4 7 1 8 0 0 0 . 6 3 2 25 0 0 .7 9Total Asset

Approach

3000 600 0.21 900 0.32 1200 0.42 1 50 0 0 .5 34030 806 0.28 1209 0.42 1 6 1 2 0 . 5 7 2 01 5 0 .7 15050 1010 0.35 1 51 5 0 .5 3 2 0 2 0 0 . 7 1 2 52 5 0 .8 9



Im licationsIm lications

A 30A 30--40% reallocation of this wealth overseas would see the40% reallocation of this wealth overseas would see thedepletion of Chinadepletion of China’’s foreign exchange reserve by close to 1 trillions foreign exchange reserve by close to 1 trillionor moreor more

After the first trillion leaves, Chinese banks will run into majorAfter the first trillion leaves, Chinese banks will run into majorliquidity problemsliquidity problems

-- ..

would cause a financial crisis. Massive state intervention wouldwould cause a financial crisis. Massive state intervention wouldbe neededbe needed InIn the short run, China cannot pluck the holes in its capitalthe short run, China cannot pluck the holes in its capital

accoun or reverse wea nequa yaccoun or reverse wea nequa y To reduce the fragility of its foreign exchange reserve, it mustTo reduce the fragility of its foreign exchange reserve, it must

aggressively raise rates to reduce the temptation to move moneyaggressively raise rates to reduce the temptation to move money

abroadabroad In the medium term, active policies should be pursued to reduceIn the medium term, active policies should be pursued to reduce

ChinaChina’’s vulnerability to the top 1% of householdss vulnerability to the top 1% of households

bw presentation shih 040811

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