Sometimes I agree with Dr. Jen
I rather suspect I favor a bigger and faster appreciation of the RMB over time than does Dr. Jen, but I very much agree with his argument for a bit more RMB appreciation in the near term. Stephen Jen of Morgan Stanley, in his most recent note:
I do believe that, relative to the trends in China’s external account, the pace of crawl of USD/CNY is too slow. First, the argument that China’s exporters are sensitive to a modestly stronger CNY is no longer compelling. Second, a stronger CNY has merits, from the capital account perspective. Third, the rapid growth in China’s official reserves is becoming a problem. Fourth, the real effective exchange rate of the CNY has not changed since 2003, despite the move in USD/CNY. The bottom line is that the cost-benefit proposition no longer justifies China confronting the US Congress over the USD/CNY parity.
(Update: the internet version of Jen's note is here. I should add that while I agree with much of what Jen wrote, I never have found the argument that China's financial sector wasn't ready for a bit more RMB appreciation compelling. China's financial sector never had a currency mismatch. What China needed to do was to clean up the banks bad domestic loans. And in lots of ways, the slow pace of RMB appreciation and the associated need for lending curbs has slowed banking reform. I also don't quite see how selling off small stakes in banks that are still majority owned by the state constitutes "privatization.")
I also agree with another point Dr. Jen makes in his most recent note: the enormous growth of state investment funds is leading to a shift in the balance of financial power, one where the "financial" power of the public sector is growing relative to the financial power of the private sector. And specifically one where the financial power of the public sector in emerging economies is growing relative to the private sector in advanced economies.
So far though, the enormous influx of funds from the public sector in emerging economies into US and European markets has been nothing but a boon to most players in the private market. They may not be as powerful as they once were (who is now afraid of the bond market?) but they are a lot richer than they used to be. And Wall Street and the City have always cared more about money than any thing else …
"Liquidity" is a nebulous concept. Everyone thinks that there is a lot of it out there. Financial assets (including complex ones) are easy to sell, making it easy to raise money for new lending or new investment. But if you look at classic measures of money growth, the US doesn't seem to be creating quite as much of it as it once did — at least according to the measures the Fed uses (M1 and M2, see the graphs here; M3 may tell a different story). Central banks have tightened short-term rates even if long rates haven't followed. Credit Suisse notes that the gap between policy rates and nominal GDP growth — one of its measures of excess liquidity — has shrunk.
As Jon Anderson of UBS points out, emerging market central banks cannot create dollars — only their own currency. They have to buy (or borrow) their dollars on the open market. They aren't the ultimate source of dollar liquidity, at least as it is classically defined.
At the same time, I don't think anyone doubts that a lot of emerging market savings is now on deposit with banks in New York. And the amount on deposit in New York pales relative to the amount on deposit with banks in London. Those funds are available to be lent out to those in need (i.e. private equity funds — the new kings of Davos). That is another meaning of liquidity: those who want to borrow seem able to find funds to borrow easily, and at a reasonable price.
And when the Saudis or the Chinese buy an Agency bond from a US pension or insurance fund, that fund is left with an influx of dollars — dollars that ultimately stem from the recycled US trade deficit — that they want to put to work.
That creates a lot of demand for a lot of other kinds of financial assets – whether the domestic dollar denominated bonds of a government still formally in default on some of its external bonds or complex structured products with lots of embedded leverage …
Emerging market central banks may not be able to create dollars, but they are behind a lot of the world's demand for various kinds of dollar-denominated financial assets …
The bottom line for Chinese leadership is social stability. The Chinese government has already endlessly debated the revaluation of the yuan and is not about to reopen the can of worms between various factions. The revaluation of the yuan remains a political decision with serious social consequences.
Brad – the article you linked to on money supply actually says M3 (no longer counted) is exploding and thus “money” is really being created at a fast pace. Or did I read it wrong?
I linked to that article for the graphs on m1 and m2 since they show a fall in the y/y growth (through Oct) … if someone has a better graph, so tell. I am not among those who believe the fed is hiding something by not counting m3 anymore
Higher bond rates helped spook the DJIA into a three-figure fall today. It seems official buyers were in shorter supply than usual in today’s 5-year note auction:
U.S. Treasuries fell, pushing yields to the highest level since August, as an industry report suggested the worst of the housing slump may be over and an auction of five-year notes drew lower-than-average demand.
Indirect bidders, the class of investors that includes foreign central banks, bought 21.8 percent of the securities sold, compared with 48.8 percent in December.
If this trend holds up, we all know what that means: BW2 might be at last crumbling as those loaded foreign CBs recognize the raw deal they’ve been given all this time.
BTW: Does anyone know where to get the number of “indirect bidders” (which includes official buyers) in Treasury auctions? I don’t get this information from the auction results.
Emmanuel — judging from the Fed’s custodial data (a bad proxy, but the best we have), central banks have decidely shifted towards agencies over the past year.
http://www.federalreserve.gov/Releases/h41/Current/
I also suspect that a few central banks have taken advantage of the dollar’s mini rally to lighten up on some of the dollars they bought in q4. there were a couple of weeks then when it was back to 2004 all over again …
that said, i don’t really see the advantage to a central bank of buying the long end of the treasury curve right now. you get more carry on the very short-end (and there are lots of short-term agency bills out there as well). and unless you think long rates are gonna fall from here, there isn’t much advantage to locking in current rates.
Thanks for that. With the ongoing housing Chernobyl, it’s interesting that they’re going into agency debt bigtime. I remember, you said it was “seeking alpha, foreign central bank style” or something to that effect. As always, caveat emptor–implicit US government backing or not, I’d be wary of these MBS “lovelies.”
The big risk with agencies is prepayment — not default. they have insurance against default from the agency … and supposedly central banks are buyers only of the good, safe high rated tranches of private MBS …
re: “They may not be as powerful as they once were… but they are a lot richer than they used to be. And Wall Street and the City have always cared more about money than any thing else … ” except for, perhaps, Moscow and Beijing? which, according to some sources, are said to be winning the ‘greatest wealth gap in the world’ contest.
‘East’ or ‘West’, what do the folks in academia, government and labour care about most?
just not sure where you’re going with this.
Academics care about academic prestige; bureaucrats about power; financiers about their annual bonus …
I don’t think the most traders care so much if the bond market isn’t as powerful as it once was so long as their bonus is getting bigger. that is all.
power = prestige = money
http://www.nacubo.org/documents/research/2006NESPressRelease_website.pdf
if only.
at the treasury, we had power and presige …
and you’re not there anymore…
a whole bunch of people in the financial sector don’t have much in the way of power, money or prestige – only aspirations – and very demanding bosses and clients. Any power and prestige they may attain (and need and want just to survive) doesn’t last long if they don’t deliver the profits.
but I’d bet the Chinese student that is trying to sue his way into Princeton is after all three (interesting something like that would be happening if the U.S. is on the verge of collapse.)
Stakes are higher in a hollowed-out, stagnant shell of a country with an gluey inbred caste system. Your derisory petit-bourgeois skills aren’t worth squat unless you get the chance to rub elbows with your betters at Ivy Club, or at least Cottage or Cap & Gown, not that there’s anything wrong with that. Your betters need the extra wealth and ease to think lofty thoughts.