THE MONSTER CARRY TRADES OF MAS (SGD 390BN) AND PBOC (RMB 4.7TN)

China has literally constructed a huge dam that is holding back a massive amount of sterilised renmenbi threatening to break out and devastate downstream. Many serious structural problems exist in China's financial system and this dam is a good analogy of one of them. 

I am no Sinophobe, but simply trying to provide explanations of complex economic and financial situations in a way a lay person can appreciate. I want to go deep into the structural problems China's central bank, the People's Bank of China (PBOC), has been struggling with for decades. It's a long story to be spread over a few posts, at the end of which, it circles back to Singapore and you will understand in a connected world, how the Chinese problem filters down to money laundering incidents on our shores. 

And for those who sing high praises of Chinese golden age and dedollarisation, difference of opinion is perfectly fine. But I hope you stick around and let's go down the rabbit hole together. I hope, in fact I am convinced, my way of explanation will make you step back and rethink it through. 

I use this dam as a good starting point having just published a post on the Monetary Authority of Singapore's financial report for y/e 31 Mar 2026. Here's hoping the striking similarity with the PBOC will have your attention.

A central bank controls inflation in one of three ways - Interest rate, Exchange rate, or Capital controls. It may use 2 of these, but can never use all 3. This is called the Unholy Trinity in economics.

An increase in exchange rate disadvantages the country's exports which becomes more expensive. So to keep the rate down, or to prevent it rising, the central bank sells the domestic currency and buys foreign currencies. There is no limit to the foreign currency it can buy since central banks can simply pay the counterparty bank by crediting their reserve account. This is what is termed money printing. The only problem is this results in too much liquidity, or too much local currency, in the economy which is inflationary. Central banks overcome this by issuing securities which investors and banks buy. This way, the excess local currency is sucked back from the market. This is called sterilisation of the local currency. So now the central bank has a debt in local currency, but an asset in the foreign currencies it purchased. These foreign currency assets is called the Official Foreign Reserves (OFR). 

Both MAS and PBOC do the very same thing. MAS issues MAS Bills to sterilise the SGD, PBOC issues Central Bank Bills (let's call this PBOC Bills) to sterilise the RMB (they do some other stuff).  As at 31 Mar 2026 MAS Bills was S$390 billion. PBOC had at its peak, 4.7 trillion PBIC Bills! These are massive debts. These have to be kept separated from the market or it will cause serious inflation. So the bills are kept rolling over once it matures. I liken this to MAS and PBOC building a sterilised dam to keep this money in.

But here's the thing. The central banks have the assets to back the debts. They do not spend away the OFR which are invested. Once you can see this, then 2 things become crystal clear. (a) The OFR in MAS balance sheet is not part of the country's national reserves. It is a reserve used to defend the exchange rate - to be used to buy back the local currency when exchange rate falls. (b) All those talk about keeping the national reserves a secret to prevent currency speculators from attacking SGD is a fallacy. It is the OFR, not the national reserves, that defends the SGD.

Now let's clear the clutter and just look at the big picture. What MAS and PBOC are doing is the same as a trading strategy called the carry trade.  This is where a currency trader, investor, or speculator whatever label you prefer, tries to arbitrage interest differentials. They borrow a currency with lower interest rates, converts it into a currency with a higher interest rate and place it in a term deposit. So we have here MAS borrowing in SGD, PBOC borrowing in RMB and investing the OFR in foreign currencies (mostly US Treasuries). The carry currency, that is, the funding currency, is SGD and RMB. 

If the interest earnings on the invested currencies (the OFR) is higher than the funding currency (SGD or RMB), it is called a positive carry. If it is the other way round, the funding cost is higher than the invested currencies, it is a negative carry -- the speculator losses money. 

Just for info, a carry trade is different from an arbitrage deal. Both borrows funding currency with a lower interest rate say SGD, do a spot FX deal to sell SGD and buy investing currency say USD. Then place USD in a time deposit to earn a higher interest. The arbitrager takes another step. He does a forward FX contract buy back SGD (to pay back the loan) and sell the USD (proceeds of the time deposit). The difference between the arbitrage deal and a carry trade is the arbitrager hedges his forward position, the carry trader is exposed. The arbitrager has locked in his profit, but because it is hedged, the net interest earning is only a few basis points. The carry trader waits till the term deposit matures then do a spot FX to buy SGD sell USD. If the market, that is, the exchange rates, remain unchanged, the carry trade stands to gain the full interest differential between the two currencies.

MAS and PBOC are like the carry trader - the forward positions are exposed. One difference is a carry trader deals with individual trades, each trade with a specific time frame, that is, the investing currency (USD) term deposit. The central banks deal with the mass of carry currencies, SGD and RMB in the sterilised dam, and the OFR, all remaining in the ledgers for who knows till when.

Another difference, is when the market changes and the carry trades turn negative, the speculator has several options to hedge and minimise losses. He can buy forward FX contracts, buy FX put options, unwind immediately to cut losses, or hold to capitalise. This is the crux of the problem of central banks. MAS and PBOC has no where to run. They cannot hedge because to do so will reverse all that they have done to get their exchange rate to where they wanted. .They simply have to take market risks as their mandate is exchange rate over profits.

Think of MAS and PBOC carry trades as if it's at wholesale level. That's because their OFRs are invested in various securities such as US Treasury Bills with various maturities and gets rolled over for as long the central bank stay invested. So they are exposed to re-pricing (revaluation) and currency translation risks. However, revaluation and currency translation are accounting P&L matters - paper losses or gains. Liquidity matters more. The interest earnings should be more than enough to cover the interest payments on the local currency debt (MAS Bills and PBOC Bills). A negative carry eats into the central bank's reserves.

Now I go into the part that is more interesting. The debt, or the funding money, or MAS Bills/PBOC Bills are local currencies held back by the central banks - the money in the sterilised dam. If this is released, that is, repaid, it will flood the economy and cause catastrophic inflation. So the debt is continually rolled over. Meanwhile, if the SGD and RMB rates continue to face upward pressure, MAS and PBOC will continue to borrow the local currency to buy foreign currency and then sterilise it with more debt. 

Paper currency notes may be neutralised by taking them off circulation and destroyed. But the currencies created by the debt instruments cannot be neutralised. I supposed they could be released a little at a time when market liquidity is tight. Just like the US Feds Quantitative Tightening and Quantitative Easing. Otherwise the money level in the sterilised dam will just keep rising under a controlled rate policy mindset.

The only way the sterilised dam valve can open and let the money flow out is policy change to let the exchange rate fall. MAS and PBOC buys back SGD and RMB and sell foreign currencies. This way, MAS Bills and PBOC Bills can be repaid without causing a liquidity problem in the market.

But depreciated local currency will create an "exchange pass-through effect" - imports become more expensive, consumer goods prices rise, CPI rises, inflation rises. It means importing foreign inflation.  

So it means the central banks continue to play the carry trade. Whether it will be a positive or negative carry, there is nothing the central banks can do. As the title to my previous post says, it is up to global external providence.

When I say there is nothing the central banks can do to clear the sterilised dam, I have a reservation. There is nothing that economics textbook teach what the central banks can do. This is where I turn my attention to China in the next few posts. China does not follow traditional economic thinking and adopts an Unholy Trinity approach. As of todate, it has managed to clear their sterilised dam of the entire 4.7 trillion PBOC Bills. Yes, they managed to do it. China has dome some real daring plumbing on their financial system. But as complex systems go, as the plumbing fixes a leak in unorthodox and unproven ways, another leak springs up somewhere.

This is why I open with this narration of the carry trade and the sterilised dam. China's financial system is in a serious mess and it has its root cause in the PBOC trying to clear the sterilised dam. If you still think China's financial health remains impeccable, follow me in the next few post and see for yourself.

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