Brad Setser

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China probably holds over 70% of its reserves in dollars

by Brad Setser
May 30, 2006

Or, rather, it almost certainly held at least 70% of its reserves in in June 2005.   At the end of June 2005, China’s reserves – counting reserves transferred to the state banks – were around $770b.   China’s holdings of US securities totaled $527b (68% of the total) at the time, according to the latest US survey data.  

And the survey only covers China’s holdings of US securities.  It leaves out China’s dollar bank accounts – so presumably China had slightly higher dollar holdings at the time.   Consequently, it represents a lower limit on China’s dollar holdings.  So I would say that China held at least 68% of its reserves in dollars – and probably more — in the middle of 2005.

More importantly, the survey data tells a very different story about the scale of Chines financing of the US than the story than emerges just from the TIC data.   Since 2004, the TIC  "flow" data has consistently suggested that a very low fraction of China’s reserve increase – maybe 40% — was going into US securities.   

For example, between June 2004 and June 2005, according to work that Casson Rosenblatt of RGE has done, China’s reserves increased by around $240b.   During that period, Chinese purchases in the TIC data totaled $97b (exactly 40% of the increase in US reserves).   But if you look at the change in Chinese holdings between the End-June 2004 survey and the End-June 2005 survey, a very different story emerges.  China’s holdings of US securities – according to the survey data – increased by $186b (78% of the increase in China’s reserves).

The TIC data tells one story.  The survey data quite another.  

That isn’t atypical.  The data are collected in different ways.  And both data sets have problems The TIC data comes from data on transactions, and thus is a good measure of flows.  But it sometimes gets the buyer wrong.  The survey data is a measure of the stock of US debt held abroad.  It sometimes does a better job of tracking the ultimate owner of US debt than the TIC data.   The TIC wouldn’t, for example pick up the People’s Bank of China’s purchase of a US treasury bond held by a German pension fund, while the survey data, in theory, would.  But, as Daniel Gros has noted, the survey data also seems to miss some foreign holdings of US debt – not everyone seems to want to report everything. 

In this case, though, the story in the survey data makes a bit more sense.  China is big and it pegs to the dollar, so if it really shifted away from dollar reserves, it presumably would put quite a bit of pressure on the euro/ dollar – and thus on the RMB/ euro.

It also leads me to wonder about some recent studies that failed to find much impact of central bank purchases on US rates – for example, this new Fed study (Hat tip, the Capital Spectator).    The Fed study found evidence of a conundrum – bond yields were lower than predicted by the model.   That is consistent with most work.   But it didn’t find evidence that central bank buying – estimated using the Fed’s custodial data – explained low yields. 

Maybe.  Other studies, like this one from the Banque de France, have come to a different conclusion.  I haven’t had the time needed to really understand the sources of the difference.   

One reason may be that the Banque de France study looked at 2003 and 2004 but not 2005 data – and in 2003 and 2004, Japanse intervention dominated the data.   Japanese buying showed up in the Fed data, in the TIC data and in every other data set.   Not so for the People’ Bank of China.  Or the Saudi Monetary Authority.  I suspect that the Fed custodial data – like the TIC data – understates central bank demand right now.   

That, I strongly suspect, complicates efforts to find evidence that central bank demand directly influences the Treasury market.  

The Fed study certainly goes against my priors.  Which makes me suspicious.  But that doesn’t mean it is wrong.  It just means I am suspicious.    Applying statistical techniques to imperfect data can generate less than ideal results.  And I would be rather surprised if record levels of central bank intervention — over $600b a year since 2003 — and China's efforts to hold its real exchange rate down in the face of pressures for appreciation (The Economist doth protest too much; Frankel has shown that China's real exchange rate is quite low even compared to other relatively poor countries) has had no impact on US rates.

Bernanke should be worried too.  Official intervention — not private flows — have been the vector that has brought the emerging world's savings surplus to the US.  Read the data in the WEO's statistical abstract if you doubt me.   So if official action has no impact on US rates, it is hard to see how the emerging world's savings glut induces the US to save less …

That said, it is also true that foreign central bank demand for US treasuries has been relatively strong in other periods of relatively high reserve growth when US yields weren’t unusually low.  Periods in the 1990s for example.   And that does suggest that central bank demand isn’t the only factor at work.


  • Posted by Michael Carroll


    Without starting a flame war can we take your unqualified statement above that the RMP is pegged to the dollar as an unembellished assessment of the truth? I realize that technically there is a trading band but in your opinion doesn’t the narrowness of this band makes this a distinction without a difference (setting aside the issue of currency manipulation laws).

  • Posted by Emmanuel

    Informative post on how TICS data doesn’t accurately capture the source of inflows, especially nowadays. Another worry for China aside from holding so much of its reserves in a currency just asking for a beating is the level of bad loans in its banking system. See what you make of Fitch’s claim that its level of bad debt is an astounding $700 billion:

    HONG KONG (MarketWatch) — China’s financial system could face $220 billion in losses due to bad loans, according to a report released Tuesday by Fitch Ratings. Fitch said the losses could swamp the reserves of major banks, and in some cases completely wipe out their capital.

    “This figure is close to one-third larger than the stock of capital in the entire banking system, underscoring the extent of asset quality weakness that still remains,” said Charlene Chu, the report’s author.

    The report also puts the country’s total amount of troubled debt at roughly $700 billion — more than quadruple the $164 billion figure frequently cited by authorities.

  • Posted by Dave Chiang

    Dangerous US Economic dependence on Japanese Yen-Carry Trade

    Yen-Carry Trade

    Global markets have been slow to grasp the specter of higher Japanese rates. In recent weeks, though, surprisingly large moves in markets from Iceland to Turkey to India have been partly attributed to the unwinding of yen trades. And where yen- volatility is concerned, we probably haven’t seen anything yet.

    What makes the yen-carry trade so worrisome — and easy to dismiss as a potential problem for markets — is that no one really knows how big it is. It’s not like the BOJ has credible intelligence on how many companies, hedge funds or mutual funds borrowed in yen — or how much — and put the money into assets elsewhere.

    It would be more comforting if the Bank for International Settlements, the International Monetary Fund or the Federal Reserve Bank of New York had a better handle on all this.

    All this may sound like a conspiracy theory, yet the world has seen before how carry trades can slam markets. There was no better example than in late 1998, when Russia’s debt default accelerated the implosion of Long-Term Capital Management LP. The resulting panic caused the yen, which had been weakening for years, to soar 20 percent in less than two months.

    Frantic efforts to unwind yen trades led to conference calls among officials in Frankfurt, Tokyo and Washington. Policy makers wondered how big the carry trade was, how much leverage was involved and what they could do, if anything, to avoid a crash in global markets.

    – Bloomberg News Agency

  • Posted by gillies

    i want to suggest that fear of another’s motives and intentions can often be a projection of one’s own aggressive feelings. this is true of all peoples and nations, but this blog comes from america and with a few outside contributions reflects largely american thinking. the focus on china may be geopolitically correct in the longer term, but financial danger may lie nearer to home. people going back into yen (repaying borrowed yen as rates rise) for investment motives may be much more potentially dangerous than the prospect of central banks diversifying reserves out of dollars. emotionally it is a less dramatic threat – but u s money managers doing their honest best are as likely to precipitate global meltdown or lesser panics as are malign foreign central banks plotting the overthrow of the west.
    in WW11 the guns of singapore faced out to sea – the japanese came over land.
    paranoia says that big bad china can undermine america. perhaps. but so can a similar shift by a multitude of investment managers triggered by something that is outwardly benign like a rising yen.
    so the keyword is ‘china.’ but the answer to the question might be ‘japan.’

  • Posted by HZ

    PBC is sterilizing big time this year (continuing from second half ’05), over 700B in the first three months, faster than reserve growth of 200B. Are they scared of inflation? Seems a bit counter-productive if they were to hold down the FX rate.

  • Posted by HZ

    very well said.

  • Posted by Dave Chiang

    Asian Economic integration fueled by financial pressure from US Dollar slump

    The US dollar’s slide against Asian currencies could provide a catalyst for greater regional economic cooperation in an effort to avoid another financial crisis, experts said.

    So far this year the US unit has fallen by between 5 and 7 percent against the Thai baht, South Korean won and Indonesian rupiah amid worries about global economic imbalances and upward pressure on the Chinese yuan.

    This is putting pressure on Asian economies by making their exports less competitive and cutting into companies’ repatriated profits and leaders in the region are worried that the US dollar will continue to decline.

    A meeting of the ASEAN members along with China, Japan and South Korea agreed in Hyderabad, India, earlier this month to study the possibility of a single Asian currency similar to the euro.

    The Asian Development Bank (ADB) has been spearheading a proposal for the creation of an Asian currency unit or ACU, which is an index of currencies, as part of a bid to bolster monetary stability and spur regional economic growth.

    The ADB is also supporting the Asian Bond Market Initiative to develop an efficient bond market for the region.

    Finance ministers of ASEAN Plus Three — which includes Japan, China and South Korea — have already made progress in boosting financial and monetary policy coordination, said Masahiro Kawai, head of the ADB’s office of regional economic integration.

    – Agency Press France

  • Posted by Joseph Wang

    Good grief. First accountants at E&Y who can’t add, and now journalists at MarketWatch that can’t read. If you look at the original Fitch press release, it says something completely different.


    Fitch notes that discussions of Chinese bank asset quality often fail to distinguish clearly between loans that are classified as nonperforming and loans still performing but on the banks’ “watchlist”, as well as loans that have been removed from the books of the banks by the government. Adding all these together would produce a total of close to USD700 billion but this would overstate the current asset quality problems of the banks. In its own analysis, Fitch takes account of potential recoveries on nonperforming loan workouts, as well as existing loan loss reserves, and makes assumptions that some, but not all of the watchlist loans default: on this basis Fitch estimates there is approximately USD220bn in total unfunded losses on the books of China’s banks.

    “This figure is close to one-third larger than the stock of capital in the entire banking system, underscoring the extent of asset quality weaknesses that still remains,” said Ms. Chu. “However, it is important to note that exposure to losses is highly concentrated at institutions that have yet to be restructured – for example, Agricultural Bank of China – while the reformed banks are less exposed.”

    “The current state of affairs is much improved from just a few years ago when unfunded losses exceeded total banking system equity by several multiples,” Ms. Chu also noted.

    In summary, Fitch concludes that the current asset quality problems are readily manageable by the banks and the government. Of greater concern to Fitch is the likely creation of new nonperforming loans given banks’ still underdeveloped risk management practices and internal controls. “We believe Chinese banks remain acutely vulnerable to an economic slowdown, although both banks and the government are more equipped today than in the past to deal with problems that may arise,” said Ms. Chu.

  • Posted by Guest

    Haven’t there been repeated references to the fact that Japan has no intention of raising interest rates significantly, or at all, any time too soon, looking at ‘Dollar plunges on Paulson appointment’ in tonight’s FT: “…Toshihiko Fukui, the governor of the Bank of Japan, reiterated his view that the end of quantitative easing would not automatically spell the end for Tokyo’s zero interest rate policy…” Sounds like the carry trade and its effects may be expected to stay with us in the near term.

    Wasn’t sure if Brad might be alluding to the possible eruption of issues discussed in this document: “…the Asian crisis revealed significant opacity in central banks’ reporting of reserve levels… With this in mind it should be recongnized that questions of capital adequacy or solvency for central banks are likely to be extremely complex and to rely on many assumptions…”

  • Posted by Guest

    Yes, I think it’s fairly obvious that asia doesn’t wish to see a plumetting USD. However, the longer the asian feds keep up with the loose monetary policy, the worse it’s all going to get.

    I think we’re going to see a gradual march of the USD downwards until the current account deficit stabalizes at a more reasonable level.

    Good to hear that they are unifying their currency, I think that’ll go a long ways to local stability.

  • Posted by bsetser

    right now, the us relies on financing from private investors from japan, central banks throughout the emerging world (increasingly in oil exporters) and the continued willingness of americans to hold most of their savings at home. if any of those variables changes in a big way, the us cannot finance its deficit. China’s central bank is the largest single actor — hence the focus on it.

    interesting point about sterilization. PBoC must not have liked the outcome of not sterilizing last fall …

  • Posted by Charlie

    I agree with Guest. I think the Yen carry trade thing is way overblown. Even if Japan did raise interest rates, there would still be a big interest rate differential between Japan and the rest of thw world. Nothing even remotely close to cause a panic unwinding. And even if there was a big unwinding, what’s the big deal? I don’t worry too much about reports that basically state ‘The fear is we don’t know…’.

    It’s difficult getting handle on the chinese banking situation. I don’t think anyone in this forum has an idea of what the NPL situation in China is. I think very few, if any, people on the inside in China even know. I doubt Business Week knows. I would ignore the press on this issue. Like I’ve said before, we won’t find out until banks are accumulating bad debt at a faster rate than net deposits for a period of time and who knows when, if ever, this occurs. Even if there is a lot of bad debt, my guess is almost all the debt is loaned in Yuan internally, so worst comes to worst, the chinese government credits troubled banks some Yuan or gives them low interest loans to bail them out. Maybe it will cause higher inflation. Maybe it will make chinese banks look poorly run to the outside world. Not a crises in any event.

  • Posted by DOR

    “Applying statistical techniques to imperfect data can generate less than ideal results. ”

    Sort of like inflation targeting without a useful CPI, hmm?


  • Posted by Anonymous

    The TIC report and survey data are in agreement one to another.

    TIC report
    Holders of US Treasury securities in China is USD297.9 billion as of June 2005

    Survey data
    Holders of LT US Treasury in China is USD277.087 billion
    Holders of ST US Treasury in China is USD20.724 billion

    Adding both survey data gives USD297.811 billion which pretty much agree with the TIC report.

    Both of these reports merely indicate the holders of such US securities with address in China. The holders are not necessarily China central bank, they could be some asset management company or corporation/private individuals, both Chinese citizen and foreigners. Many rich Americans hide their savings from within the reach of the IRS by buying US securities through trust companies in Cayman Islands; I am sure there are also Americans who buys US securities through companies set up in China. So really, how can we know the amount of US securities hold by China central bank?

  • Posted by Anonymous

    What about China’s private holdings of U.S. securities – are they close of to non-existent to use the TIC annual survey data as a proxy for official holdings without any minor adjustments even (though we may be unsure of exactly how much to adjust)? Are restrictions on outflows tight enough to make that assumption? Who are the non-official players that might be able to get money out of China and into the U.S. that might muck up these assumptions? Thanks

    Kind of asking this question way after this was posted, but I hope it gets some response!

  • Posted by bsetser

    Anonymous — your question is a good one. There might be a need to do some adjustments.

    I’ll tell you why I didn’t though.

    a) private holdings are technically illegal. controls on outflows and all. I don’t thinkt the qualified domestic institutional investor set up was in place in any significant way. And consequently, if you hold US securities in the mainland in a private account, my bet would be that you aren’t respndinding any US government survey …
    b) given the net inflow of private money back to China, Chinese investors were likely running down their stock of external assets, not adding to them — at least over the relevant time period. so it shouldn’t have much of an impact on the “changes”

    I am open to alternative arguments though. i wouldn’t use the same methodology for say Japan.