Brad Setser

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Another month, another $30b for China’s central bank … but what happened in April?

by Brad Setser
June 28, 2006

China’s reserves increased by around $20 billion in April and $30 billion in May – reaching $925 billion.   

China’s $20 billion April total was rather meager.  Russia added almost as much.  The Middle Kingdom usually doesn’t just top the reserve growth league table; it does so with style.  

May was more like what we have come to expect.

Seriously, China’s April reserve increase seems a bit on the low side. 

China's April trade surplus was around $10.5 billion.  And the euro rose from $1.214 to $1.262 or so during the month of April.   That should have increased the dollar value of China’s existing euro reserves in a big way.   Casson Rosenblatt and I estimated that 70% dollar/ 20% euro/ 10% yen reserve portfolio would have increased in value by $9.8b in April.    Or just assume China had around $200b in euros at the end of March (23% of its portfolio).  Those euros would be worth around $208b at the end of April.    

 The trade surplus and valuation alone should have generated a reserve increase of close to $20b.  Add in a typical month’s FDI inflows and ongoing hot money inflows, and I would have predicted a total closer to $30 billion. 

So why was China’s reserve growth “only” $20 billion” in April?

Three possibilities come to mind: 

  • Hot money inflows into China reversed in April, and became outflows.  If China attracted $5b in FDI inflows, it would have needed $5b in hot money outflows in April to limit its reserve growth to $20b.  This strikes me as unlikely.  Hot money flows into the rest of Asia picked up after the G-7 communique.  Generally speaking, intervention elsewhere in Asia picked up in April.   And hot money flows seem to have resumed in May, judging from the $30b reserve growth.  But it is certainly possible.   As US interest rates continue to rise, the gap between US rates and low Chinese rates keeps on growing.
  • China holds more dollars and fewer euros than people think, so it didn’t experience $8-10b in valuation gains in April.  A very dollar heavy portfolio (think Japan’s 85% or so in dollars) though is hard is a bit hard to square with China’s strong q4 04 reserve growth (there was a big euro/ $ move back then, and China’s reserves jumped).   A dollar heavy portfolio also makes it hard to explain China’s strong May reserve growth, which presumably reflected some valuation gains.  The same 70/20/10 portfolio could explain $4.2b of China’s $30b may reserve growth.
  • Chinese outbound FDI picked up in April.   Say payments on one of the recent foreign acquisitions of one of China’s state oil companies were made in April.   Such outflows would help to offset ongoing FDI inflows.   

I like explanation number three.  But I don’t have the supporting evidence.  And if someone has a better explanation, do tell!

The $30 billion reserve increase in May fits my expectations a bit better.    China’s $13 billion monthly trade surplus in May pushed the total up.   Valuation gains were around $4b.   That implies capital inflows of around $13 billion – probably a mix of FDI and hot money.  

There is little doubt that China’s reserves are now huge.   They clearly are on track to hit $1 trillion in the third quarter. 

In reality, they probably are already very close to a trillion, if one includes dollars the PBoC has shifted to the state banks.  Remember China transferred $60 billion in reserves t to the state commercial banks – though most people think that the central bank has agreed to protect the banks from any exchange rate looses.  China also seems to have used around $6 billion in swaps (maybe more) with the banks to lower its reported reserves.  But under the swap contract, the central bank is obligated to buy back the dollars at fixed rate.  

Add $66b to $925b and you get a total that is darn close to $1 trillion at the end of May. 

Then throw in another $20b for June …


  • Posted by HZ

    This does not agree with PBC data which shows FX reserve up Y66.6B or $8+B in April from March. But I don’t know if PBC tally data at end of the month or if there is other accounting issues. Also I mentioned earlier the theory of sending out funds to HK for the big IPOs, esp. considering how over-subscribed the IPOs were.

  • Posted by HZ

    Also valuation change means little for monetary policy. PBC’s concern is over-issuance of RMB. Valuation change does not affect RMB already in circulation (though it does impact PBC balance sheet).

  • Posted by bsetser

    Well, both measures show a smaller than expected increase in fx reserves in April! Do you know off hand is the RMB appreciated v. the $ in april? With lots of $ denominated assets, that might lower their RMB value — valuation effects, but of a different kind than euro/$. Just a theory. $8b is extremely low given the trade balance and euro/$ moves.

  • Posted by HZ

    Same balance sheet also shows that PBC only issued Y8B (or $1B) bonds in April, which matches the meagreness of FX growth.

  • Posted by HZ

    PBC balance sheet is here, in case you need it:

    And USDCNY movement in past three months:

    Agree that FX valuation could be accounting quirks but bond issuance shouldn’t.

  • Posted by DOR


    There’s a fourth possibility: the FDI, trade, reserve composition and hot money data aren’t good enough to get within $10 billion of the number they decide to print.

    This isn’t OECD quality data, sir.


  • Posted by bsetser

    DOR — re “Not OECD quality data” — true. But reserves and trade data are usually among the most reliable data that comes out from any economy. China is no exception.

  • Posted by jm

    According to this presentation by Treasury’s Assistant Secretary for Financial Institutions, “foreign investors …own nearly $1 trillion of GSE debt and MBS. Indeed, GSE obligations held on behalf of foreign official institutions at the [NY Fed] have been increasingly rapidly over the last 18 months and now exceed $500 billion.

    What will be the political impact in China if US home prices revert to their historic average multiple of income levels and so fall about 50%, wiping out trillions of dollars of illusory equity and destroying the GSE’s?

  • Posted by HZ

    “What will be the political impact in China if US home prices revert to their historic average multiple of income levels and so fall about 50%, wiping out trillions of dollars of illusory equity and destroying the GSE’s?”

    First that would probably destroy U.S. economy first — meaning it aint going to happen.
    Secondly total mortgage outstanding is over 9T. 1T is about 11% of it. Everybody who has a money market account or bond funds own these.
    Thirdly GSEs are not all that exposed: nationally housing price did not go up nearly as much as some of the bubble areas, and you can hardly buy anything in the bubble area with a conforming loan.
    Fourthly I don’t understand the desire to see the Chinese getting socked, at the price of destroying our own economy. China, selling their goods cheaply, earned its money by blood and sweat, certainly more so than the U.S.

  • Posted by MrBill

    “Fourthly I don’t understand the desire to see the Chinese getting socked, at the price of destroying our own economy. China, selling their goods cheaply, earned its money by blood and sweat, certainly more so than the U.S.”

    Blood, sweat and by running an economic growth policy at any price to create jobs at the expense of unfunded future liabilities in the form on unsustainable development and environmental destruction for example. Those are the tears.

  • Posted by MrBill

    I am not even sure they are covering the long-term cost of their capital, as most firms would not employ IRR or ROE calculations, and so far the equity financing in the form of JVs and FDI has not been paying back dividends to external shareholders, so how do we measure profitability? Certainly not by output of goods alone?

  • Posted by Guest

    Re: “how do we measure profitability?” Good question.

    “…The most recent additions to a lengthy roster of bank-fraud cases brings to the fore a basic question about the future of China’s financial system… “This case that has emerged at the Agricultural Bank of China is just a minor one among the overall problems with China’s state-owned banks,” said Yi Xianrong, a director at the China Academy of Social Sciences’ financial research institute in Beijing. “Lots more such cases are not discovered and will be discovered sooner or later, as the most serious problems involve medium- and long-term loans.”…”

    “…Foreign companies are turning increasingly to China’s fledgling legal system to protect their intellectual property and trademarks, as Beijing attempts to address one of the biggest complaints by foreign governments and multinationals doing business there. Retail giants from Wal-Mart Stores Inc. and Starbucks Corp. have filed trademark lawsuits in China to protect their logos and names, and Intel Corp. has also sued in the market to protect its intellectual property…”

    “Asia’s economic boom may have generated formidable wealth in the region’s most robust economies in recent years, but the surge in exports has resulted in a rise in inequality, higher unemployment, and persistent food insecurity, according to a UN report published today… Women too have lost out: in most countries their unemployment rates are higher than men’s. “The fact that Asian agriculture has not performed well is at the heart of the story,”… “Over half a billion people still go hungry in our region, more than in any other part of the world.”…”China’s economy grows at 10%; its employment grows at 1%,”…”,,1808363,00.html

    re: (from the previous post): “Hope I am wrong and should the US slow, China will decouple.”

    Wonder what Mr. Paulson is thinking.

    “…The cosying up of the Chinese to the Russians assumed a new height with President Putin’s visit to China in March. No less than 29 cooperation agreements were signed… An agreement for the construction of US $10 billion gas pipeline to China from Siberia was also sealed. Russia is building two nuclear plants in China…”

  • Posted by DF

    “First that would probably destroy U.S. economy first — meaning it aint going to happen.”
    I don’t understand that line. It will destroy the US economy first and it is going to happen.
    Do you mean to say :
    a Nothing ever destroyed the US economy and nothing ever will, because … Duh ! The USA are above cycles of credit, the USA experience neither credit booms nor credit busts.
    b Housing prices will go on rising forever even if fundamentals show that there is a NATIONWIDE 50% overappreciation (meaning much more than 50% in hot places and less in the countryside). Is there a new economy explaining that THIS time, housing prices can rise forever, and so can the debt relative to the GDP. This time it is DIFFERENT.

    If neither a, nor b, how can you conclude that if something is going to destroy the US economy, then it will not happen.
    May be you have this incredible belief that the FED is stronger than the market and it can prevent all credit crunch in a much more efficient manner than the japanese because as we all know japanese are stupid and illiterate (or some other likewise reason).

    I don’t see how you can deny the fact that housing prices need to adjust (probably by more than 50% since 50% would only bring them back to the long term average, and since revenues are bound to fall too)…

  • Posted by kz

    1Q GDP was revised upward to 5.6% from 5.3%.
    Initial Claims were a bit higher than expected at 313K. But still the month of June was better than May or April.
    Existing Claims went down to 2809K from 2439K.
    Personal Consumption went down to 5.1% from the prior of 5.2%.
    Most importantly, core PCE went down to 2.0%, which is the borderline of the Fed’s concern.
    The report this morning has fully justifed the Fed to raise its rate today; the U.S. economy is not slowing down as obviously as bearish economists would like to see.
    Just reporting.

  • Posted by OldVet

    brad, reverting to Movie Guy’s exposition, the “hot money” is probably flowing back to China’s equity markets because of relaxation of controls on US technology exports to China, in anticipation of a huge boost in hi-tech development in the next couple of years. You could see that in the way EM equity funds tanked in May/June, while China equity funds stayed pretty stable, and now all are a bit higher than the trough. China’s got the industrial and human infrastructure to absorb massive amounts of technology and put it to use right away. Wish India were in the same position.

    Plus, as per Mr. Setser, China’s got the option to substiture domestic investment and consumption for export production if needed, to account for slowdowns in US demand. Incidentally, the fledgling intellectual property protection efforts in China are probably the quid-pro-quo for massive injections of US commercial technology into China. Makes sense, doesn’t it? Nimble assets indeed, but US firms may find it’s all carrots and no sticks when time comes for the big payoff they hope for. I suppose without such wacky optimism, there would never be risky investment.

    DF, congrats on your new diplomas, and good luck. There was a 30% fall in house prices in Los Angeles in the 1970’s after a huge runup, and some similar declines in Boston and some other areas. Generally house prices stay “sticky” to the upside, it’s not a normal market, but moves in long cycles. Most of the info I see indicates a huge slowdown in sales and construction, the main effect of which right now is inventory buildup, with price declines and employment damage to follow. But a generalized 50% decline is most unlikely. I’m hoping to snap up a discount condo in Florida where overbuilding was very excessive, but could hardly count on a 50% decline in Tennessee where I live. France has got its own little bubble in housing, by the way, as do most countries worldwide other than Germany. Even EM’s have amazing housing bubbles, for example in India – I’ve got a crony there who makes more on housing speculation than I’ve made on their stock markets, percentage wise, believe it or not.

    Economically, China’s (and other countries’) reserves are a subject of interest on how they will be used, and to what benefit, and when. Japan has huge dollar reserves, and if it’s exports to the US and the rest of the world revive, those reserves will rise further. Japan’s reserves, along with Singapore’s and others, may get invested in India, if India gets off its ideological hands and allows massive infrastructure development. Taiwan companies are investing heavily in Viet Nam. So high reserves may just be a cushion against calamity in the world economy, or they can be used as an active force for good. Rather than try to limit such reserve buildups, why not encourage Japan, Saudi Arabia, China, and Korea to use convert their reserves from passive US dollar bonds to longterm investments in EM’s?

    (from “Morgan Stanley’s David G Fernandez, head, Asia Economic Research of JPMorgan says. . .

    Q: Last time you told us that fund interests were still high in markets like India. If indeed the Fed does make these moves, how much of a liquidity squeeze do emerging markets like us have to start facing?

    A: It is important to cite the type of structural flows, which is what I am seeing coming out of places like Japan into India. That kind of a structural flow believes that a long return story is not going to turn just because of the global liquidity squeeze. They still need to find places to put their cash, and in a place like Japan, if we are right, where the growth continues to be strong, those flows are going to continue to come to places like India.

    It is simply a matter of timing. It is not an overall call where you want to allocate and in that score, India is going to be high on every investor’s card. It is a matter of timing and if you are still in a world where you are uncertain about the Fed outlook, then the timing is wrong for investors to come in now in a large way. That is what you are going to continue to see. As long as the Fed is uncertain, even for a good story like India, you are going to see investors staying on the sidelines.”

    OldVet Theory: Global imbalances don’t have to mean ruin for the extravagant or hardship for the industrious. We could work it out a different way. The main obstacle is political fear – sometimes well founded fear. Interest rate rises might cause a drawback of private investors, but why should it stop governments?

  • Posted by Guest

    The watchdog should bark but not bite: The “sub-prime” market in home loans for those with patchy credit histories is currently the fastest-growing part of the mortgage market. Mortgages Plc, owned by Merrill Lynch, estimates that sub-prime mortgage lending totalled £25bn-£30bn last year and accounted for about 10 per cent of the mortgage market.

    US budget challenge: Overall entitlement spending is set to rise from 8.7 per cent of GDP in 2006 to 20 per cent by 2030 – roughly the share taken up by all spending today. To underline the consequences of inaction, Standard and Poor’s recently said US Treasury bonds would be downgraded to BBB by 2020.

  • Posted by Guest

    I’d like to hear the opinions of commentators on why, in the face of all the facts that indicate a severe downturn is coming our way, the stock market continues to push higher every excuse it gets. Are the bulk of investors bullfools, or what? Don’t they read this blog?

  • Posted by a

    The stock market is convinced that Greenspan’s free put is still there. If things get too bad, then the Fed will cut rates, if need be to 0. Supposing that to be the case, investors are rational to buy – there is no cap on the upside, but a floor on the down.

  • Posted by Nathan

    DF and others,

    What exactly makes you believe housing prices are going to fall 50% in nominal terms? I am curious as to what long-term reversion you are referring to. I think housing especially is one of those things where the bubble theorists pick their stats (rapid appreciation being one) while ignoring others (debt service levels, strong job growth, “sticky” prices) that contradict their case. But, in any case, that was interesting info regarding foreign GSE debt holding.

  • Posted by HZ

    The housing crash by 50% scenario is the depression-style deflation that the central banks know how to deal with. If fiat money is good for anything, this is certainly the central one: there is no physical limit on the supply. I don’t mean to imply that the economy is indestructible, just not by this path.

  • Posted by Joseph Wang

    My pet theory is that hot money is now leaving China now that it is clear that China will revalue the currency in a way that designed not to reward speculators.

  • Posted by Guest

    China’s heavy foot on the gas pedal: For a country that insists it operates a market economy, China is finding it remarkably hard to accept that the laws of supply and demand also apply to raw materials and energy. China is deluding itself if it thinks it can use its economic muscle to get foreign producers to subsidise its bad habits by supplying its needs at cut-rate prices.

    It is a measure of how poorly Beijing understands global markets that officials claim that it can afford to wait until LNG prices fall before increasing imports. The argument makes no sense. Delaying purchases jeopardises China’s future energy security because it risks being locked out of a global market in which almost all supplies are sewn up on long-term contracts.

    China’s inflexible stance means it now stands no chance of meeting its official commitment to raise the proportion of its energy consumption met by natural gas to 8 per cent by 2010 – an essential step towards cutting chronic pollution levels. It is also inflicting serious costs on its economy. Supply shortages are already causing gas-fired electricity generating plants to shut down, threatening to bring about even more severe and widespread power cuts and loss of industrial output during the peak season.

    China’s policy muddle is made worse by its caps on domestic oil and gas prices. Although it has sought to relax them, it has moved only slowly and the disparity with world prices remains large. Its persistence removes incentives to reduce domestic energy consumption and increase China’s abysmally low levels of energy efficiency.

    Energy revolution will continue to power ahead: The average Chinese uses a tenth as much primary energy as the average American and a fifth as much as the average Japanese. Moreover, the average Indian uses less than half as much as the average Chinese. Suppose then that over the next two and a half decades, China and India follow much the same development path as South Korea. Then by 2030, these two countries combined would consume at least three times as much primary energy as the US does today.

    While developing countries account for about half of global energy demand now, they will generate roughly three quarters of the increase between 2002 and 2030. If development continues to spread throughout this century, the demand for commercial energy might rise five-fold.

    – What, then, does the deep-seated link between economic development and energy consumption imply for humanity’s future? The answer is that it points to four big questions. First, where might all this energy come from? Second, what does it mean for energy security? Third, what does it imply for our ability to deal with the threat of climate change? And, finally, what can economic policy contribute? I plan to address these questions in future columns. But one point is already clear: anybody who thinks it will be easy to reduce global energy consumption is simply dreaming.

  • Posted by Guest

    “…of course, macro-economic stability does not necessarily translate into higher living standards for ordinary Mexicans [or Americans, Chinese…?]. Otherwise, why would so many of them head northwards to find work, swelling the ranks of up to a million immigrants who enter the US illegally each year in search of a better life?…”

    DF – is there any possibility that a soft landing scenario could play out as a bargain buying spree for cash rich foreigners and Americans (who may want to diversify the profits from their stock market windfalls) as overextended, hard working, Americans – and guest workers – with declining incomes and increasing costs, abandon their homes as they accelerate a decent into disaster?

    Someone I spoke to on his return from a business trip to one of China’s new industrial towns said people were starving. “There are no dogs in the streets.” Whether or not incomes in that district were generally considered to be above or below the ‘poverty’ line, his observations led him to believe that many were not making enough to pay for the food they could no longer produce themselves, along with the housing which many are now required to buy at market rates. The UN report quoted by today’s Guardian (link above) seems to back up his observation. Don’t know if the green revolution has not yet reached China – or if it may not yet be working there.

    (Monsanto is one of the NYSE’s top gainers today, presumably on today’s news: “Monsanto Chairman, President and CEO Hugh Grant:”Nothing says growth like raising the ceiling on what is possible, and that is exactly the trend we’ve seen in the performance of our seeds and traits business up to this point in the year. This performance sets us on the future trajectory for growth…” …Monsanto reported net income… which was significantly higher than the same period last year. The increase in net income for the third quarter related to higher revenue from the company’s U.S. seeds and traits business…”)

    I would like to believe OldVet’s Theory: “Global imbalances don’t have to mean ruin for the extravagant or hardship for the industrious. We could work it out a different way. The main obstacle is political fear…” But I still can’t help but wonder if the bigger obstacle may be power and greed on a global scale.

    It is difficult to imagine how the ‘American’ and ‘Chinese’ economies could be decoupled without significant pain for everyone on both sides, although if the poorer populations in both economies are the only ones to be hit particularly hard, perhaps both economies can continue to look relatively ‘healthy’ – at least on paper.

  • Posted by Guest

    Don’t panda to misty-eyed sentiment: Pandas are badly designed, undersexed, overpaid and overprotected. They went up an evolutionary cul-de-sac and it is too late to reverse.

  • Posted by Guest

    Trashing Cash In A Flash “…I’ve returned to find some disquieting news from Morgan Stanley’s bond research shop in my email box (sorry, no link): After restoring their balance sheets to the point where they feel comfortable increasing spending or returning cash to shareholders, many companies are now seeing interest coverage decline, because the new spending isn’t translating into enough earnings growth to reduce their leverage levels. And as the bank’s analysts point out, the timing couldn’t be worse in light of concerns about a slowing economy. The analysts are careful to say they aren’t forecasting double-digit default rates, but the research makes for sobering reading. Leverage is up while earnings are declining for a fairly significant proportion of issuers. As a result, for example, interest coverage has fallen during the past year by anywhere from two to 21 times at such companies as American Axle & Manufacturing, Nova Chemicals, Chiquita Brands International, Pilgrim’s Pride, Pogo Producing Co., Whiting Petroleum Corp., Davita Inc., Landry’s Restaurants, and Unisys. Another ten companies have experienced declines of at least 100 percent. And the overall trend is negative in a wide range of industries, including, autos, chemicals, media, consumer products, health care, retail and transportation…”

  • Posted by bsetser

    I am pretty sure that the vast majority of folks in the equity markets don’t read this blog. They may read the big picture, but mostly to figure out after reading BArry why he is wrong. The near-term economic data is — as kz noted — quite mixed. And corp. profits are high (the flip side of limited wage growth) making valuations far less stratospheric than they were.

    Finally, i quite confident that equity market folks are much more in the Mandel camp (if US firms are so strong and profitable, how can the imbalances be real) than in the setser camp (you cannot import way more than you export forever, and US firms are that much more profitable than foreign firms … )

  • Posted by Guest

    Question being if the equity market folks are in Mandel’s camp, might the Setser camp represent another distinct team in this game?

  • Posted by OldVet

    Bernanke’s statement today was seen as weak by the equity markets, and man are they flying! At least the dollar was falling this afternoon, which is good for the US’s deficit problem. Small potatoes, given the lack of restraint for financial markets and the lack of incentive for savers. Still, most smart money stays locked on a decline/recession in the US based in large measure on housing market declines.

  • Posted by psh

    If ya wanted a big market readership you’d have to put out some technical analysis for the masses, “CAD in a classic blowout top!! Dollar forming perfect head-and-shoulders!!!” Nobody resonates to your multivariate approach without a lot of thought. Delong’s flirtation with online spreadsheets is interesting in that light. I bet people here would fool with a communal spreadsheet. Not to give away the RGE store, of course, but your logic is best specified by the math of it — unlike the reasoning of many higher-profile opinion leaders. Getting people to start peeing on each of your assumptions is a great way to form consensus.

  • Posted by Joseph Wang

    OldVet: I don’t think that technology exports restrictions really make that much difference. China is not interested much in importing technology in the form of machines. What it is really interested in is importing people that teach Chinese companies to build the machines. It’s less about importing chips and software from Intel and Microsoft, than to figure out how China can create its own Intels and Microsofts.

    Guest: I do take issue with articles that start out with the presumption that Chinese officials are idiots. It’s not necessarily a bad thing to play hard ball with suppliers. The rules of supply/demand don’t require one to roll over. Also, the government is trying very hard to get rid of price controls, and official sentiment is that they are bad for the standard economic reasons. The trouble with getting rid of them is that you run into a lot of public opposition if you do it too quickly, and the NRDC is trying to decontrol petroleum prices as quickly as possible without causing riots.

    Guest: I haven’t heard about people actually starving in China, and am very skeptical, and am curious what makes your friend think that people are starving. Urban residents have some sort of basic safety net, and rural residents can always go back to the farm if things get too desperate. The other thing is that Cantonese are the really the only group of Chinese that would even consider eating dog meat. The other thing is that factories will usually pay for subsidized housing for people from the interior.

    One final thing, one problem with the term “peasant” is that it sort of implies that the Chinese farmer is stuck in the 18th century. In fact, Chinese agriculture makes extremely heavy using of fertilizer, pesticides, and monoculture, and isn’t that good for the environment.

  • Posted by Guest

    Joseph – my friend’s observation was made with concern and not contempt. His experience is growing up in another country which had, and still has a very large, very poor population. The system failed and people survived anyway they could. The UN report, along with other reports of increased rioting, increasing costs outpacing income growth, brought his comment to mind. Thought the Guardian’s version of the UN report dealt, or attempted to deal fairly with the growth issues that go beyond China and Asia.

    “…heavy using of fertilizer, pesticides, and monoculture, and isn’t that good for the environment…”

    anywhere – agreed. And one reality that makes a possible systems failure, anywhere, different this time is that relatively few people have the capacity to produce their own food.

  • Posted by Joseph Wang

    Guest: It’s sometimes difficult to communicate over electronic means because it doesn’t send voice innotations, but I wasn’t challenging or offended by your friends observations, merely trying to understand them. My model of the economic situation in China is that hunger isn’t a major problem, so if there are even small pockets of hunger in China, then this seriously changes my view of things.

    Even if he didn’t see hunger, he obviously saw something interesting and I’m trying to understand what.

  • Posted by DOR


    I agree that trade data are likely to be more accurate than, say, CPI.

    We know the US only sold $41.8 billion worth of goods to China last year, but China actually bought $49.7 billion worth. We know China sold America only $163.9 billion in exports in 2005 but America really bought $243.5 billion. (Hey, that’s better than Indonesia and Singapore, which can’t even agree if they have ANY trade in a southern direction, according to the Direction of Trade Statistics Yearbook!)

    We also know that China’s end-2005 $60.3 billion utilized FDI was really $72.4 billion (20% more?). We also know we can guesstimate hot money flows from Balance of Payments errors and omissions.

    We know a lot, but we can’t question a mere $10 billion margin of error. The data aren’t good enough for that.

    * * *


    China’s stock markets move on insider information, razor thin liquidity and sucker punches. I don’t think US tech transfer rules even come up on the radar.

    And, I like your theory, but perhaps something about election years might fit in there, too.

    * * *


    I’m with Joseph Wang on this: There are almost never any dogs on any streets in China. It has nothing to do with starvation, just regulations: heavy licensing fees for pet dogs. Cantonese (and Koreans) might eat dogs, but generally at a pretty steep price on the menu.

    My favorite casual measure of prosperity is footwear: the poor farmer has none, the recent arrival in the city has flip-flops (thongs), the construction worker has the leather dress shoes he got married in and the better off fellow has a different pair for different occasions.


  • Posted by DF

    “If fiat money is good for anything, this is certainly the central one: there is no physical limit on the supply. ”

    There’s no PHYSICAL limit. However there are very strong political ones. How come central bank money was about 25% of money supply in the 50’s and it now is less than 5% ?

    WHat has happened ? WHy did central banks, worldwide, stop printing money and allow private banks to create money instead of them ? WHy did they privatise money creation ?

    My bet is that they favored the banking system, promoted a credit bubble by not caring about it.

    If you think they could get inflation rolling now, now that debt is over 300 % of GDP… I don’t buy it. Just watch Japan, Japan tried to get inflation going and it took them 10 years to get a result, and their situation back in 1990 was much better than the one of the USA and the world now.

    Housing prices are high relative to revenues and relative to rents. THat’s what indicates that prices are 50% overvalued as a mean. In the USA and Spain, and UK, and France, worldwide indeed except may be in Japan and germany (still paying their bubble of 1990).

    Of course the reason prices are high is because cheap credit money has been offered, affordability is quite good and people have “illusory” jobs, just like they have “illusory” wealth, and by illusory is meant, job and wealth whose existence can only be tracked to a rising debt level. Suppress the credit boom and housing jobs go down, and so do finance related jobs, and surprise those are the two sectors that created most jobs in the last years.

    Central banks do not print money in prevention of future deflation, that’s the sad story, they do not regulate credit money expansion in prevention of future deflation, that’s the sad story, the ratio of central bank money relative to private bank money is still falling, and fast, and worldwide.

  • Posted by DF

    oh, and I forgot to add, that’s the sad story, along with the decling share of wages within GDP, the increasing debt/GDP ratio, and in general our collective move at full speed towards the iceberg called debt deflation depression, also named, wake up boys, Keynes and Polanyi showed you the way but you chose not to listen.

  • Posted by OldVet

    Hi Joseph, I didn’t mean physical products embodying technology – I meant the real thing; designs, knowledge, training, knowhow, science, formulations, and intellectual property. That’s what’s behind the relaxation in tech exports, not products. And what’s ahead for China’s boom in higher tech exports to ROW and within China itself. About the time the US econ slowdown ends in a few years, China ought to be geared up for a whole new wave of production.

    Hi DOR, I’m not investing in China companies yet, but in rest of Asia for now. I’m still worried about the inherently unstable political situation which could screw up trade, investment, progress. Minute that changes, I’m on board. For now, I’m making big bets on India and Brazil even absent progress on infrastructure. (If I come back in another life, it’ll be as an infrastructure development specialist.)

  • Posted by HZ

    “There’s no PHYSICAL limit. However there are very strong political ones. How come central bank money was about 25% of money supply in the 50’s and it now is less than 5% ?”

    Have you considered how the velocity of money has changed? Think jet traveling and internet transactions. I don’t think we need a conspiracy theory for this.

  • Posted by DF

    HZ the velocity of money is unrelated to the debate here.

    Besides as far as the velocity of money is concerned, if you calculate it by dividing the GDP by the supply of money at constant prices … You will find that it is indeed falling.

    THere is more money chasing not so much more goods and prices do not rise much.

    Of course that is a false perception since there are in fact 2 kinds of prices consuming goods prices and production goods prices and the increase in money supply has had a huge impact on the level of production good prices (asset prices) and the velocity of money in the financial sphere may indeed have risen).
    However even if you make a distinction between the money supply used in transactions of consuming goods and the money supply used in transactions of producing goods, and between the velocity in the real sphere and the velocity in the financial sphere … I’m not sure you can prove that velocity in the real sphere has risen. I bet it has fallen. BUt I’d like numbers.

    Anyway, as pointed in introduction, the fact that the velocity of all kinds of money has risen or fallen, is unrelated to the fact that the share of central bank money within the total money supply (of exogeneous money within total money supply if you prefer) has fallen.

    And it’s not a conspiration theory to state that governments have chosen unlimited expansion of credit rather than printing themselves cash in order to pay for their own expenses.

  • Posted by Guest

    Stephen Roach: The turn — or lack thereof — in the global liquidity cycle is key for the financial market debate. We are all in agreement on that. The metrics that enable us to judge how and when are in serious dispute, however. As for the quantity story, my advice is to give up the ghost. Rather than looking at quantity measures of liquidity, I would prefer, instead, to focus on the price of liquidity — i.e., by focusing on real interest rates. On that basis, the Fed has turned the knob on the liquidity spigot — but the flow is still steady (i.e., neutral). It is still wide open in Japan and flowing with reasonable speed in Europe.

  • Posted by Guest

    Stephen Roach: We in the West are biased toward looking at China through a very macro lens — focusing on its daunting scale and what that means for us. Ironically, that misses the basic tension that defines Chinese reform and development — a tug-of-war between the micro and the macro.

  • Posted by Guest
  • Posted by MrBill

    Re the tug of war between the macro and the micro

    “These banks haven’t moved far from their old business model of shoveling money to state-owned enterprises,” he said in an interview with MarketWatch. “That business model isn’t sustainable in the long-term. It’s not going to achieve good profit margin. Banks need a more diversified portfolio”

    Investors are still overwhelming interested in top down investing to catch the next big thing, and are still ignoring the basics whether it is an oil company in Russia or a big bank in China.

    If I had 1.3 billion employees nominally working for me, could take credit for all their collective successes, and sweep the collective mistakes under the carpet, I guess I could flatter my external balance sheet, too. Reminds me of investment grade countries with aging, third world infrastructures. If you only look at the balance sheet and not the economic realities then it is easy to make a silk purse out of a swine’s ear.

  • Posted by Guest