Posted on Thursday, August 7th, 2008 by bsetser
Airbus is looking to source more parts (and produce more) in the dollar zone. Selling a product denominated in dollars with a euro cost structure isn’t currently a recipe for enormous profits.
China is part of the dollar zone, for better or for worse. It will soon be making A320s.
So is Abu Dhabi, though it is quite hard to see why an oil-exporter with a huge external surplus like Abu Dhabi should be in the dollar zone. Being a part of the dollar zone is a big reason why inflation is very high (and probably far higher than reported) in the Emirates.
Abu Dhabi could easily import all the airplanes and airplane parts it wants. $100 billion in export revenues split among a small population produces a lot of buying power. Abu Dhabi’s native-born residents are far too wealthy to spend their time building planes. They prefer flying them …
But Abu Dhabi aspires to do more than pump oil. And its proliferating sovereign funds have the resources to make most dreams come true. Or try too.
ADIA is Abu Dhabi’s best known fund, but it is far from alone. Over the past few years it has been joined by Mubadala, the Abu Dhabi Investment Council (a fund set up to manage ADIA’s regional investments) and perhaps Taqa (an ambitious state energy company that is investing in energy projects outside of the Gulf — and in effect doubling down on Abu Dhabi’s energy exposure rather than diversifying away from it). Wayne Arnold writes:
There are at least eight Government-owned or Government-controlled institutions now investing sovereign funds on behalf of Abu Dhabi. Far from just trying to drive up short-term gains, most share the goal of securing the long-term prosperity of the emirate, whether by providing nest eggs for retirement, securing long-term supplies of food and energy, promoting the development of new industries that create skilled jobs and reduce Abu Dhabi’s dependence on oil, or just amassing endowments.
While ADIA may have a portfolio that looks rather like a pension fund or a university endowment, Mubadala is more of a “sovereign economic development fund.” Its mandate goes beyond returns. It is also supposed to promote Abu Dhabi’s internal economic development.
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Posted in Sovereign Wealth Funds, oil | 1 Comment »
Posted on Tuesday, August 5th, 2008 by bsetser
At the first hint of a slowdown, the US tends to take steps — like a fiscal stimulus package — to support domestic demand.
Though to be fair, the US has also loosened monetary policy, and one of the ways monetary policy helps support the economy is through a weaker dollar and stronger exports. Some of the smartest advocates of fiscal stimulus advocated it in part because they worried that cutting policy rates would might fail to generate the intended stimulus because of financial weakness while risking a true dollar crisis.
And at the first hint of a cyclical slowdown, China tends to take steps — slowing RMB appreciation, increasing export rebates — to support its export sector.
Keith Bradsher of the New York Times has joined the chorus writing about signs that China’s economy is slowing, and that Southern Chinese manufacturers who produce for export have been particularly hard hit. There certainly is no shortage of supporting anecdotal evidence. And with growing signs of weakness in Europe — and now signs that US export growth may be poised to slow – it isn’t difficult to believe that Chinese exports are poised to slow.
But as of now, I don’t see any solid evidence of a slowdown in the actual export data.
On average monthly exports in 2006 were about $17.3b higher than monthly exports in 2005. On average monthly exports in 2007 were about $21.7b higher than monthly exports in 2006. I plotted 2008 exports against the a forecast that assumed that 2008 monthly exports would be on average, $19b higher than 2007 exports. $19b is the average of the y/y increase in 2006 and 2007. Guess what? So far, exports have been above the resulting forecast.
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Posted on Monday, August 4th, 2008 by bsetser
Korea’s reserves fell by about $10 billion in July — a bigger fall than in November 1998,* at the height of Korea’s crisis. Korea, of course, has WAY more reserves now. It can afford to intervene heavily — as it clearly did earlier this month. The release of its reserves data just confirms something that the FT, among others, have already reported. Indeed, the reported fall in Korea’s reserves was a bit smaller than the $15 billion some expected. Some estimates even put Korea’s July intervention at close to $20 billion.
The fall in Korea’s reserves though highlights an important shift: many Asia’s currencies have decoupled from the Chinese yuan. There is still pressure on the yuan to appreciate,and China is still buying a lot of dollars to keep the CNY from appreciating. But a lot of other Asian countries are now selling dollars (and euros) to keep their currencies from falling.
This is a shift. In 2005, 2006 and 2007, most emerging Asian economies (Japan is different story) faced pressure to appreciate. Most were adding to their reserves. And many had currencies that appreciated faster than the Chinese yuan. That was even true in the first couple of months of this year, when countries like India and Thailand were all buying dollars to keep their currencies from going up.
Now, these countries — and countries like Korea that didn’t face the same pressure to appreciate earlier in the year — are all intervening to keep their currencies from falling. And for the first time in a long time, their currencies aren’t going up faster than the Chinese yuan.
Indeed, many emerging Asian currencies have depreciated against the dollar this year even as the yuan has appreciated. In 2006 and 2007, the slow pace of CNY appreciation was a constraint on faster appreciation elsewhere in Asia. Now, the depreciation of other Asian currencies seems to have become, if anything, a constraint on further appreciation of the yuan.
So why have the fortunes of China’s currency and many other Asian currencies diverged?
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Posted in central bank reserves, emerging economies | 20 Comments »
Posted on Sunday, August 3rd, 2008 by bsetser
The Gulf has — by virtue of its peg to the dollar — entered into an era of “single digit interest rates and double digit inflation.” So writes the Global Financial House in its report on the Gulf’s economic outlook:
the region would have to “live with the paradox of single-digit interest rates and high double-digit inflation”, said Ala’a al-Yousuf, Chief Economist at GFH.
Moreover, loose monetary policy is generating pressure to loosen fiscal policy, as it is hard to explain why real wages for government workers are falling when oil revenue is soaring. That too will add to inflationary pressure:
So far, the government response to spiralling inflation has been in the form of higher wages, increased subsidies and other cash incentives, the report said, in the absence of any relief from the currency effect of the dollar peg.
“In our opinion, the GCC is entering a phase of loose monetary-fiscal policy spiral, which, together with a wage-inflation spiral, have trapped the region between two impossible trinities,” said Hany Genena, Senior Economist at GFH.
Government spending is set to rise 25% this year, reaching $300 billion. That is roughly half of the Gulf’s likely oil export revenues, assuming roughly 15 mbd of exports, an average oil price of around $120 for the year and $5 a barrel production costs. And that total leaves out — I think — a lot of government sponsored investment projects.
No wonder the region is booming. Monetary and fiscal policies are both wildly expansionary. This will, over time, help to reduce the oil exporters surplus and thus facilitate global adjustment. But it also risks laying the ground for big problems if the price of oil turns down.
Letting the exchange rate adjust up — and down — with the price of oil still seems to me to be a better way of managing commodity price volatility.
One thing though is clear: at current oil prices, the small Gulf states are once again fabulously wealthy.
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Posted in Monetary policy, oil | 30 Comments »
Posted on Thursday, July 31st, 2008 by bsetser
The odds that the US slipped into a recession around the turn of the year have increased. Nouriel Roubini is convinced. Jim Hamilton isn’t. The risk that US growth may slow later the in year are rising. So far, US export growth has remained robust – supporting growth. The pace of export growth hasn’t risen recently — if has been strong for a long time — so much as the pace of import growth has slowed: Imports have contributed positively to growth for the last three quarters, meaning real imports fell (see Dean Baker for more). But there is a growing risk that export growth will slow with a slowing global economy.
Signs of trouble are now visible in Europe. And not just in housing and finance-dependent economies like the UK – where consumer confidence has really plummeted. Anything that includes the phrase “worst since 1974″ cannot be good. Europe, writ large (i.e. counting “new” Europe) has been a more important engine of global demand growth that the US since 2005, so a European slowdown matters for the world. Especially if Europe slows before the US resumes sustained growth.
Japan hasn’t had much momentum for a long-time. It isn’t likely to find new momentum now.
Of all the major economies – and with a $4 trillion GDP and $1.4-$1.5 trillion in goods exports this year, China is far too big to be considered anything other than a major economy – China has by far the strongest growth.
Its exports have held up quite well as the US – and Chinese exports to the US — slowed. Thank Europe – and booming sales to India and a host of other emerging economies. Many emerging markets fear cutting tariffs on Chinese goods far more than cutting tariffs on US and European goods. But forward looking indicators* suggest a broader slowdown in exports. Chinese manufacturers and policy makers are worried.
And it increasingly seems like China took a policy decision to slow the RMB’s appreciation against the dollar (and thus to slow the RMB’s likely appreciation against all the other large oil-importing economies) in order to support China’s export sector. That decision came even though China has the strongest domestic economy and the largest current account surplus of all the large oil-importing economies.
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Posted on Wednesday, July 30th, 2008 by bsetser
Russia’s central bank has indicated that it has cut its holdings of Fannie and Freddie debt by about half since the beginning of the year. Russia’s central bank claims its $100 billion portfolio has been pared down to $50 billion. Russia presumably also holds Ginnie Mae and other “Agency” bonds that have an explicit government guarantee – the US data suggest that Russia’s holdings of Agencies are higher than its reported holdings of Fannie and Freddie debt.
So much for the notion that all sovereign investors are always long-term investors, willing to hold difficult positions through thick and thin. Russia likely concluded that the political cost of holding Fannie and Freddie paper isn’t worth the extra yield. Russia’s net sales likely put at least some pressure on Agency spreads.
That raises something that I have been meaning to write about for a while now – the tendency to accept uncritically the argument that official investors (notably sovereign funds) have played a stabilizing role in the subprime crisis. To be sure, Merrill, Morgan Stanley, Citi, UBS and Barclays would be in more trouble now if not for the capital they raised from sovereign funds. The sale of convertibles and common stock to sovereign funds (and in the case of UBS, a large “private” investor in the Gulf) in December and January has proved to be a good deal for the banks and a bad deal for the sovereign funds. But it is still, I suspect, a stretch to conclude from these investments that official investors have played a stabilizing role in the crisis, for three reasons.
– Purchases of bank shares represent a very small share of total official flows
– Many key institutions don’t disclose enough information to evaluate whether or not their overall activities have been stabilizing or destabilizing
– The available evidence suggests a flight away from credit risk by some sovereign investors, which added to distress in parts of the market.
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Posted in Sovereign Wealth Funds, central bank reserves | 44 Comments »
Posted on Monday, July 28th, 2008 by bsetser
Capital flows through London are often taken as a proxy for petrodollars. Bloomberg’s Daniel Kruger, for example, argues that the buildup of Treasuries (and I would assume Agencies) in the UK reflects oil money.
The Organization of Petroleum Exporting Countries held $153.9 billion in Treasuries at the end of April, Russia had $60.2 billion and Norway owned $45.3 billion, according to the Treasury Department. Combined, that represents a 113 percent increase from 12 months earlier. Oil producers own a majority of the $251.4 billion in Treasuries held in the U.K., an 85 percent increase.
Unicredito’s Dr. Harm Bandholz also uses capital flows through London as a proxy for petrodollar flows.
This isn’t unreasonable. London probably manages more petrodollars — and more Gulf sovereign wealth fund money — than any other financial center. And there is a reasonably close correlation between the UK’s purchases of Treasuries and the price of oil (or my estimate of oil foreign asset growth).
Correlation though, doesn’t imply causation. There is also a close correlation between purchases of Treasuries and Agencies through London and China’s reserve growth.
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Posted in Sovereign Wealth Funds, central bank reserves, oil | 64 Comments »
Posted on Thursday, July 24th, 2008 by bsetser
Emerging market financial crises in the 1990s followed a fairly consistent pattern.
The country lost access to external financing.
The sector of the economy that had a large need for financing – firms in Asia, the government elsewhere – had to dramatically reduce its need for financing. Asian investment collapsed. Argentina swung from a fiscal deficit to a fiscal surplus (helped along by its default on its external debt). Turkey began to run large primary surpluses.
Financial balance sheets shrank; credit dried up.
The country’s currency fell sharply. And its current account swung into balance, if not a surplus.
That process was incredibly painful. Falls in GDP of 5% or more were not unknown. It also meant that after a year or so, most emerging markets had reached bottom. Their economies had adjusted, as had their currencies.
A year – almost – after its crisis, the US economy hasn’t endured a similar period of adjustment. Economic activity has slumped, but not fallen off a cliff. US households are pinched (and unhappy), but spending hasn’t collapsed. The US current account deficit has fallen, but not by much – the rise in the oil deficit has offset the fall in the non-oil deficit. Banks have depleted their capital, but I don’t think that they have – in aggregate – shrank their balance sheets. Then again some of the expansion of their balance sheets may not have been entirely voluntary, as off-balance sheet assets and liabilities moved on to the formal balance sheet.
Residential investment has fallen significantly as a share of GDP.
But in other ways, the US hasn’t adjusted.
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Posted in Systemic Risk, U.S. trade deficit and external debt, housing | 72 Comments »
Posted on Tuesday, July 22nd, 2008 by bsetser
Chinese policy makers are concerned that China’s economy is slowing.
The stock market is obviously well off its highs, taming some animal spirits.
Housing prices in Shengzen are no longer rising.
Complaints from the export sector are growing – even though China’s exports are still up substantially relative to last year. Some forward looking indicators suggest that the global slowdown is catching up to China’s export sector – and a slowdown in exports could spillover into a slowdown in investment.
At the same time, China is worried about ongoing hot money inflows, and the ongoing difficulty sterilizing extraordinary fast reserve growth. A host of controls have been tightened. Controls on exporters. And now controls of FDI inflows. Yu Yongding of the Chinese Academic of Social Sciences characterizes China’s new capital account policy as “easy out, difficult in”. He is right. Note as well Dr. Yu’s comments on the “unattractiveness” of QDII)
And to make matters worse, there are fears that the recent rise in inflation has changed domestic expectations about future inflation. Dr. Yu writes that “inflation expectations have been firmly established among the public.”
Key members of the state council recently went south to hear the complaints of exporters first-hand. And Chinese policy makers are now meeting, reportedly to set the course of China’s economy policy over the course of the remainder of the year. Michael Pettis relays a report in the South China Morning Post:
The nation’s [China’s] top decision-making body, the Politburo, will meet this week to consider major economic policy for the mainland for the rest of the year amid growing concerns over slowing growth, rising inflation and, in particular, a dramatic decline in exports as the global economy slows. All the most senior leaders completed fact-finding missions to economic strongholds and key export bases early this week, according to reliable sources.
The policy choice is fairly binary: Should policy be directed at controlling inflation, or supporting growth?
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Posted on Monday, July 21st, 2008 by bsetser
Answering these questions has been a long-term obsession of mine. I am not sure I have the answers, even now. China’s government doesn’t make tracking the growth of its foreign assets easy.
But I do have fairly detailed estimates. What’s more, these estimates are generally based on data that China itself releases, often in somewhat obscure places – though, given data lags, I sometimes have made estimates to bring a data series up to date. Of course, both my interpretation of the data and the assumptions I have used to produce data through the end of June could be off. These are estimates.
Based on the assumptions laid out in the technical notes, including an assumption that the transfer of foreign exchange to the CIC was largely completed by the end of q1 2008, I estimate that China’s government currently manages between $2.3 and $2.4 trillion in foreign assets. The central bank (SAFE) manages $1.8 trillion, the CIC manages $109 billion (my assumption), and the state banks manage $430 billion. This implies that China’s state banks have become one of the largest reserve managers in the world — their combined portfolio trails only the reserves of Japan and Russia. The combined portfolio of the CIC and the state banks it formally owns would make it the second largest SWF in the world.
The pace of growth in China’s foreign assets is equally impressive – I estimate China added, after adjusting for valuation changes, something like $785 billion to its foreign portfolio over the last 12 months (i.e. from June 2007 to June 2008). Just a bit under $420 billion of this comes from the increase in the central bank’s reserves. The CIC got an estimated $107 billion (after adjusting for its purchase of Huijin and the funds it injected into the CDB), and the banks holding of foreign exchange increased by a little more than $250 billion. Most of that increase ($200 billion) comes from the fx held as part of the banks reserve requirement; the remainder comes from an apparent increase in the banks swaps position with the central bank in the second half of 2007.*
For the first half of 2008, China added – as best as I can tell – about $430 billion to its foreign assets, with $250 billion coming from the increase in China’s reserves (after adjusting for valuation gains), $90 billion coming from the increase in the CIC’s foreign assets and $90 billion coming from the increase in the banks reserve requirement. This estimate is close to the estimate of Michael Pettis and also to the estimate of Logan Wright.
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Posted in China, central bank reserves | 65 Comments »
