Yet more evidence that emerging markets cannot create the financial assets their citizens want to hold …
If I am doing my math right, Chinese citizens added RMB 4.83 trillion (around US$ 620b at 7.8 RMB to the dollar) to their RMB-denominated bank accounts over the course of 2006. It seems like more and more Chinese are putting their savings in the bank (rather than holding onto cash) at a time when the PBoC is injecting a lot of "liquidity" into the local economy. During that same time Chinese citizens reduced their holdings of domestic dollar deposits by RMB 0.033 trillion (around US$4b) even though dollar interest rates exceed RMB interest rates. Not exactly strong evidence that Chinese private savers are desperate for dollars …
China is trying to restrain domestic Chinese investment in its frothy domestic stock market even as it loosens restrictions on capital outflows and tightens restrictions on capital inflows.
Domestic Chinese savers just don’t seem that keen on keeping the dollar share of their portfolio constant. Come on guys, trendy modern economic theory says that a falling dollar is a reason to increase your dollar holdings – and the out-performance of the Chinese stock markets is a reason to increase your holdings of US stocks. Get with the program!
China’s banks haven’t been able to match their surge in deposits with a surge in lending. If my math is right, Chinese bank loans increased by RMB 3.18 trillion (around US$ $405-410b) in 2006. But don’t blame the banks. They were more than willing to lend out their surging deposit base. The central bank just wouldn’t let them.
And if any one can provide a detailed accounting of what China’s banks did with the RMB 1.65 trillion (around US $210b) that they didn’t lend out, I am all ears …
Some of it is on deposit with the central bank as a result of rising reserve requirements, and some has been used to increase the banks holdings of PBoC sterilization bills. I also wouldn’t be surprised if some RMB has been swapped with the central bank for dollars … but that is just a hunch.
It probably isn't a coincidence though that the gap between the banks deposits and te banks lending roughly matches both China's fx reserve growth and its current account surplus. The savings of the good burghers of Shanghai that are not being lent out in China are being lent to the US, with a bit of help from the central bank.
China, incidentally, isn’t atypical. Brazilian private savers haven’t been willing to shift enough money out of Brazil to offset foreign demand for Brazilian real-denominated assets (and Brazil’s own current account surplus). That is why Brazil’s reserves are rising rapidly. They were up $32b in 2006.
And Russian savers also seem increasingly willing to keep their savings in Russia.
Russia just released its (preliminary) 2006 balance of payments data. Its reserves (flow basis) are up by $107.5b, more than its estimated $95.6b current account surplus.
But that isn’t all. The government repaid $29b in debt, and the central bank repaid another $7b. Combine the fall in Russia’s debts with the rise in the central bank’s assets, and Russia’s government generated a net $143.5b outflow.
That implies large net private inflows into Russia.
And they aren’t that hard to find in the balance of payments. Net inflows to Russian banks totaled $25b in 2006, up from $6b in 2005. Net FDI and portfolio flows totaled $27b in 2006, up from $0.5b in 2005. No doubt some Russians are continuing to move their savings abroad (though increasingly they seem to be holding euros and pounds rather than dollars), but those outflows have been more than offset by private capital inflows.
Ruble deposits in Russian banks are way, way up. Look at M2 growth.
Indeed one of the big (underreported) stories of the past few years is how savers in emerging markets are increasingly willing to hold their savings in the local banking system in local currencies despite low nominal interest rates (China) or low nominal and negative real interest rates (Russia). It has been better to get low returns in the local bank than to hold (depreciating) dollars.
Foreign investors — private investors that is — have also been quite keen to put funds into emerging market financial assets.
That is the basic problem I have with all theories that attribute the uphill flow of capital to financial underdevelopment. Right now, emerging markest don't seem to be having any trouble generating financial assets that their citizens want to hold, or that foreign investors find attractive. The big outflows from the emerging market are all coming from … drumroll please … the official sector.
Well chinese people are not as risk savvy people
than other nations of the world especially US.They
are not consumptive than their counterpart in US.
Thwy are heavy savers.These is what media headlines
says.
That’s not the reason.This is because there are no
financial instrument options placed upon them.They
are restricted except in saving in bank deposits.
They can get better returns if they invest in stocks
in hongkong or in their own market or invest in japanese real estate to boost their own returns and
boost consumption in japan.
One thing is sure.Chinese people must explore more
oppurtunity themselves around the world.
They can also take risk(not to extent of US) but
what is needed for them is little bit exploring ideas
to make their earned money work better for them
Gold, gems, real estate. That’s what Chinese want to hold. Why? Maybe thousands of years of experience of government capriciousness and a static world view.
To put a finer point on it, wealth per se was not as highly regarded as wealth plus learning and prestige. Successful merchants would hire tutors for their children so they could advance, at best, through the nationwide examination process to become “scholar-officials”, who were described by Marco Polo as Plato’s philosopher kings.
My grandfather was a product of that system, but with a twist. His prime assignment was to westernize China. I don’t think complete “westernization” will ever be accomplished. Chinese will not become individualistic profit maximizing risk takers before the Western (mainly Anglo-Saxon?) infatuation with financial (virtual) assets and high-tech toys reaps a bitter harvest (ooh, too classical, perhaps?).
As for me, I’ll stay in California; the gorgeous real estate here may be overvalued now, but I bought when it wasn’t.
As I understand it one invests its assets internationally only for two reasons :
a) when domestic conditions make you loose confidence in your nation (fiscally , politically, ….)
b) when you are rich enough to think about diversification
Nowadays local investors in em are only thinking about their private pension fund (as their is no social security)and their financial sophistication doesnot allow them to invest abroa. further more local authorities are happy to collect this money (chinese banks belong to the government)
Miju
actually, what the Chinese now hold is a huge amount of bank deposits (combined with a lot of urban real estate and some stocks) … there has been an absolutely enormous surge in deposits in the chinese banking system over the past few years, one that exceeds what by any other standard would be an enormous increase in lending. That is the key point here — Chinese savers seem to have confidence in the domestic banking system and in the RMB. They don’t seem to be moving their funds abroad.
(1) Dr. Setser: I’ve been meaning to ask this for the longest time: Because official outflows dominate, does this fact negate the “global savings glut” hypothesis? Given what you’ve written so far, I take that it does from your POV. Yet, can we also say that these governments are channeling their people’s (Ahnuld would say “peepul’s”) savings into suboptimal foreign investments, hence there still is a glut albeit ill-used?
(2) China’s banks haven’t been able to match their surge in deposits with a surge in lending…They were more than willing to lend out their surging deposit base. The central bank just wouldn’t let them.
If we go by S-I=CA single equation economics, then that implies an even bigger current account surplus. I’m not so sure what’s worse–more me-too local investments with marginal returns or an even larger current-account surplus that annoys the ROW. It’s a no-win situation. Please buy more stuff, Mr. and Mrs. Chinese Consumer.
Emmanuel — your second point is right; it is also point that Martin Wolf has also made — he thinks, china’s policy of restricting bank lending to avoid inflationary pressures is essential to maintaining the real undervaluation and thus the current account surplus.
On your first point, I have criticized Bernanke’s “glut” speech for neglecting to highlight the role official policies have played in maintaining the “glut” but I increasingly think he had a point — namely that there was a “glut” of savings in the oil exporters (mostly government savings) tho that is changing as consumption and investment in the oil exporters are picking up and oil prices are down and that there is a glut of savings in China. In general terms, noting that there are large official outflows doesn’t contradict the notion that there is a glut of savings. but i do think more attention should be given to the role of policy in creating the glut, rather than sort of implying it is a natural market outcome.
Unless there are serious problems with the under-reporting of income and savings held by large segments of the population, but going from reports like: “…many Chinese people are not big consumers of services as they earn just enough to live…” http://english.people.com.cn/200701/23/eng20070123_343973.html ) - might we assume that the vast majority of local bank savings are deposited by extremely wealthy and priviledged individuals with very close ties to government and their own capacity to move the markets. That their confidence in the system may be influenced by the fact that they are the system.
And as we might assume that these same individuals also hold a great deal of money offshore, how much of the ‘foreign’ private sector inflow may, in fact, be round tripping. (Assuming that we are talking about individuals here and not firms - and that we need to make that distinction?) And given the nature of offshore markets, how much can we possibly know about how and where that money is held.
Come now Brad, it is a bit early for sarcasm. BWII still standing. Bond yields still ridiculously low. Equities still high. America not yet quite collapsed.
Even poor Chinese are huge savers.
The problem isn’t the bank deposits. Chinese are more than willing to save money in the banks. The problem is that the mechanisms for what to do with that money aren’t well-developed. If China tried to spend that money in China, the odds are that it would be wasted.
So that wealth from bank deposits effectively ends up in the United States. The PBC is able to sterilize the huge dollar inflows because of the deposits in the banking system, and this results in a capital transfer from the China to the United States.
I agree with Joseph Wang that the main problem with countries with big savings surpluses is the lack of well developed mechanisms to channel these savings to better yielding investments based on the Malaysian experience.
However, this seems to me a moot point given that most/all(?) countries with huge surpluses are deriving them (directly or indirectly) from exports and are most probably those countries with pegs (actual or disguised) to the US$ in the first place.
In the event of a de-peg, the local currency strengthens and unless the yields on the foreign investments are sufficient to cover or exceed said losses, you’d end up with a net loss.
Unless you strongly believe in the soft landing scenario when the imbalances adjust, it wouldn’t seem rational for a knowledgeable individual investor to take the risk as long as you can get some kind of reasonable yield from a local investment.
Corporates, on the hand, would naturally have the added buffer of real or perceived advantageous commercial considerations which could discount the forex risk. However, in the aggregate, I believe that amount of wealth in private hands far exceeds that held by corporates in most developing countries.
Might the development of these products factor into this discussion?
“RBC Capital Markets… this week announced that it has completed two of the first ever bonds denominated in Russian rubles (RUB). “When RUB became an eligible settlement currency on January 15, we wanted to be there to meet investor interest in Russian rubles,” said Avril Pomper, RBC Capital Markets’ head of fixed income distribution, Europe. “We’re very active in local currencies, and we’re seeing that investors are willing to diversify away from traditional currencies like the euro and yen into emerging markets like Turkey and Iceland.”…” http://www.lesaffaires.com/fr/Aujourdhui/detail.asp?id=249745&id_section=479
Guest — I have not tried to hide the fact that the Roubini/ Setser story about the collapse of BW2 hasn’t happened. Reserve growth has been very high. US bond yields are very low. There is no evidence that CBs are racing to get out of $, and very limited evidence that sterilizing $300b of foreign asset growth is causing intolerable financial strain on China. The Roubini/ Setser early 05 story has not been born out, certainly not in the relevant time frame.
our critique of the valuation gains/ exorbitant privilege style arguments also hasn’t been born out. foreigners haven’t demanded a yield premium on us assets to compensate for the risk of further dollar depreciation. and Even after the $ stopped falling, foreign equities have outperformed us equities.
But I do think that those arguing that emerging markets cannot create financial assets their citizens want to hold need to do a better job of explaining how their theory fits with the observed collapse in net private outflows from emerging economies. Chinese citizens are more inclined to hold RMB today than in 01, russians are more inclined to hold rubles — hell, even Argentines are more inclined to hold pesos.
The BW2 argument, by contrast, seems to be fully consistent with the facts — the official sector has been the vector moving EM savings into advanced markets, keeping bond yields down and so on.
Do you disagree?
One potential consideration:
Suppose domestic Chinese bank accounts were really the best place for the depositors to put their money?
They all know that the yuan will eventually go up against nearly all other foreign currencies. Does any economist disagree?
Who else can bet on such a one-way bet?
I have no specific knowledge, but one might consider the notion that domestic Chinese might be reluctant to invest in foreign markets because the scrutiny they might get from local officials or police. E.g. “are they considering leaving? If so, why? Are they being paid by foreigners to do something?” Political risk can go both ways.
They see their growth rate as really high domestically so why take political risks? And then there’s the risk the government will unpeg the yuan, resulting potentially in a 15-30% one day loss in overseas investments—do they want that risk either?
I guess they presume that the government will not allow domestic banks to fail and renege on their deposits—that’s certainly a risk but if such a thing happened it would surely cause great political turmoil which authorities are unlikely to desire. And with the central bank having such titanic external reserves presumably there would be capital to pay off depositors to prevent an Argentina-like situation.
Am I the only one who is getting a bit confused about how poor China’s poor really are and how their savings are held and transmitted?
As DOR mentioned the topic of alternative remittance systems perhaps he can elaborate, but this is the only comprehensive report I’ve ever been able to find, and it is getting to be very dated, so even vague indications of the size of this market could be greatly changed along with questions about sorting out the ‘criminal’ from the ‘non-criminal’ transactions (by whose definition?) and tensions, tolerance or perhaps even some cooperation between this and institutional systems: http://www.interpol.int/Public/FinancialCrime/MoneyLaundering/EthnicMoney/default.asp
Whether or how this system moves the market is another question.
Matt,
While RMB may be universally expected to appreciate against USD, that is hardly any comfort to the average depositor. Their expenses are in RMB after all. The interest rate is low so bank deposits are barely keeping up with inflation.
Brad,
I think the way to look at the deposit/loan difference is to take into account the charge offs that Chinese banks had to do. Loans are bank assets and deposits are bank liabilities after all. So all the past charge-offs are bound to show up as net deposits. While the recent recapitalization beefed up the equity position of the banks it has little effect on the net deposits.
Matt — I agree with your argument. HZ’s point about the average saver wanting to protect RMB purchasing power is right, but the average saver worried about his rmb purchasing power doesn’t want to hold an asset that depreciates in rmb terms and could depreciate by a lot.
HZ — the charge offs come out of net interest income … i.e. a bad loan on the books is written down and replaced by asset financed out of earnings. or bad loans are bought at par by the PBoc and asset management co. they could artificially lower loan growth tho — i.e. loans when up by x but y were written off, so total loan growth is reported as x-y. However, i think this was a much bigger deal in 04/05 (I know jon anderson adjusted his data for this) than in 06 …. ICBC was cleaned up mostly in 05.
HZ’s point is a good one. RmB can nomainlly appreciate against all other paper, where all paper depreciates in real terms to tangible commodites, and harder assets. This would almost certainly accompany a reasonably inflationary scenario. I am no moldbug, but I certaionly have doubts about Chinese & Indian authorities desire, will, or capability to protect the value of domestic savings. As a result I will admit to occasionally loosing sleep while conjuring not-so-fantastical scenarios where demand for alternative stores of value (be they property, mold, gold, gemstones) simply explodes from the large savings and poor policy creating a rather rationally-inspired mania.
While “Guest” is concerned about yield and lack of instruments providing “it”, savers should really be concerned about hedging real domestic purchasing power. The inability of authorities to address both this concern and inflation will result in a property bubble that will dwarf anything seen to date on this planet - even Tokyo’s 1990 finest!!
Brad,
I see you are talking about the increase in net deposit, not aggregate. That must be mainly due to increase in reserves. I think in the past for every yuan of deposit they were able create about 3/4 yuan of loan. (4:1 ratio for loan to reserve money). They appear to be doing a lot less based on the numbers you quoted. I assume the sterilization bills are not included in the loan amount you quoted. If I back out using the old ratio the loans would use about $100bn in reserve money. So the other $100bn are presumably tied up in sterilization bills?
Agree that charge-offs should be covered by interests except for the large recapitalization programs. That doesn’t explain what happened in 2006.
Cassandra,
With so much cash on hand that certainly seems to imply inflation to come. But for China at least, domestic inflation can be mitigated by more imports and less exports. The first wave of commodity inflation seems to have passed. If they succeed in exporting inflation in terms of manufactured goods, the consequence could be quite interesting for the rest of the world. Could that be required of any conceivable readjustment process?
If a billion Chinee jumped up in the air in unison, would the world change course as they landed? Something to think about…
Evans
Evans,
HW assignment: A) design a system that would allow the billion Chinese to jump up in unision; B) calculate the odds of the jump happening by random chance