The Monetary Economics of China (Brad DeLong)

Brad DeLong does some calculations to find out where China's massive trade surplus goes:

"The current configuration appears to be that China's exporters pile up a net trade surplus of RMB 3 trillion a year in foreign currency, which the central bank buys for RMB in order to maintain the exchange rate value it wishes. The exporters than deposit this cash RMB 3 trillion a year in the banks of Shanghai. The People's Bank of China then buys RMB 2.5 trillion of this cash for 3% not-very-tradeable bonds plus a promise of future capital injections should the banks get into trouble as long as they play ball, leaving RMB 500 billion to increase the monetary base and so support the growth of M2..."