The $10b a month club
Forget nukes. To be in the top-rung of emerging powers – a true brick in the new global financial order – you need to prove yourself by financing the US. With growing (economic) power comes responsibility …. And specifically the responsibility to do your part to prop up the beleaguered dollar, and finance a US current account deficit that is now far larger than the private markets want to finance.
In February, for the first time, it looks like four different countries joined the $10b a month club.
India’s reserves were up $14.6b in February. A bit of that came from valuation gains, but on a flow basis, India no doubted added substantially more than $10b.
Russia’s reserves were up $10.7b between February 2 and March 2 …
Brazil’s reserves increased by $9.985b – $10b in my book– in February. They rose another $2.2b in the first week of March.
All three added on average over $2b a week to their reserves in February. For the sake of comparison, SAMBA calculates that Saudi Arabia – which can almost mint dollars by pumping oil – only added on average $1.4b a week to its reserves (SAMA foreign assets) in 2006.
China hasn’t reported its reserve growth, but with a $24b (gulp) February trade surplus it is hard to see how China’s reserves didn’t increase by significantly more than $10b. $30b seems likely, unless China did something to hide its reserve growth. China’s current account surplus is bigger than its trade surplus, it still is attracting net inflow of FDI and private Chinese savers don’t seem so keen on the dollar.
Call it $30b for the BRIes and $30b for China.
That is $60b in reserve growth from only four countries … and February is short month, one where both Brazil (Carnival) and China (New Year) took a week off.
For comparison, the US trade deficit is currently running at around $60b a month, and the current account deficit is around $70b a month. So if all the BRICs reserve growth was directed toward dollars, it would be enough to roughly finance the US trade deficit. And if other emerging economies added $10b to their reserves and sent them all to the US, that would be enough to finance the US current account deficit.
All the talk about how we live in a world dominated by private capital flows frustrates me.
The data increasingly suggests that we live in a world dominated by the policies of a small number of really big official players – with private market players positioning themselves in accordance with what they expect the really big players to do.
Countries like Brazil and India attract big capital inflows, but send the money back to the US rather than use it to finance large current account deficits. More on that soon.
Countries like Russia still bank a large share of their oil and gas exports – and also send net inflows of private capital back to the US and Europe.
And countries like China have lots of spare savings to lend the world. But Chinese private citizens want to hold RMB not dollars or euros. So sustaining the net outflow of Chinese savings requires a rather complicated operation where the PBoC, in effect, borrows the RMB that it won’t let the banks lend out and uses them to finance its lending to the US. The story is a bit more complicated because China issues RMB against its growing reserves and then removes them by in effect buying them back in exchange for debt, but the net effect is that the PBoC ends up holding dollars and euros that China’s private savers no longer want to hold – thus sustaining the RMB’s undervaluation and China’s large surplus.
Sum up the growth in the foreign assets of the GCC countries, and you might have a fifth member of the $10b a month club – SAMBA is forecasting that the Saudis will average a bit under $5b a month in reserve growth, and ADIA, QIA and KIA all are adding to their foreign assets. Japan reported a $9.7b plus increase in its reserves in February as well. But Japan cheated – Japan banked the interest payments on its bonds, but it also marks its portfolio to market and thus a large part of the rise in Japan’s reserves is explained by the fall in US interest rates.
p.s. you could easily argue that real power comes from big stocks, not flows. That increases the relative importance of private markets – as there is a lot of US and European private savings that is invested in US assets that has to stay invested in US assets to sustain the current equilibrium. On the official side, there are basically three members of the trillionaire’s club, if you generously round Japan’s $900b to a trillion. The GCC countries almost certainly also have a trillion dollars in foreign assets among them, though the money is divided between three large investment funds (ADIA, KIA and QIA), one big central bank (SAMA) and, I assume, the private holdings of a couple of ruling families. But they don’t coordinate …
Quick question: What, if any, official role does SAMBA have? Does SAMBA stand for anything? From its website, I gather that it was formed during the nationalization wave during the early 80s, but that’s about it.
SAMBA doesn’t have any official role — though it seems like it is partially owned by one of many Saudi government funds. It basically is the old Citibank saudi Arabia — SAMBA originally stood for the Saudi American Bank. It does produce a set of nice data rich reports in english on S. Arabia, which I rely on for a lot data/ information … especially since the IMF doesn’t publish its article IVs for S.Arabia.
What’s really scary re: China is the fact that the RMB ground to a halt against the dollar in the second half of the month. So either the private sector sold out of its RMB holdings, offset by Chinese exporters (yeah, right), or PBOC accrued even MORE reserves than the traed surplus would suggest, given the sudden stagnation of USD/CNY.
macro man — thanks for highlighting the CNY’s recent stall (i recommend that others read your blog post on the topic as well). Methinks that the the Feb trade surplus may include some disguised capital inflows (I have been resisting this conclusion for a while, but it is hard for me to quite see where 40% y/y growth is coming from otherwise — and i do think the Chinese have tightened controls on inflows). And i wonder if the PBoC saw some things that have yet to me mae public (i.e. we don’t know jan or feb reserve growth, and we don’t know how aggressively the pboc used swaps to limit reported reserve growth) that led it to conclude that the strong expected pace of RMB appreciation was revitalizing hot money inflows … so it opted to cool the pace of appreciation for a bit to try to make it less of a one way bet.
The Indian reserve number surprised me. I had thought India was a net consumer of global surpluses. Any idea whether this is a fluke or the start of a trend?
the huge scale of indian reserve growth in february is probably a bit higher than can be expected going forward — as LC notes, India runs a (still relatively small) current account deficit, so net inflows were well above valuation adjusted reserve growth (I haven’t valuation adjusted india’s february data, its reserves are split about 50/50 between dollars and euros/pounds). but indian reserves have been growing at a fairly rapid clip for some time now — valuation adjusted reserve growth for example was quite strong in november. Strong indian growth, the performance of indian equities, the development of a bit of a yen/ rupee carry trade (even a yuan/ rupee carry trade, per Mukherjee) and growing interest in india from the gulf have all generated inflows. So I don’t think the February number is entirely a fluke either — we live in a world where a growing number of private investors want to finance current account deficits in brazil, china and india, not just the US current account deficit. so long as these countries resist letting their currencies appreciate (and in some cases keep domestic interest rates above us rates to achieve their domestic goals), they likely will need to accumulate reserves on a fairly consistent basis. the scale of their reserve growth though may hinge a bit on what is going on in global markets — bouts of risk aversion lead to lower inflows into EM equities for example, while periods of $ weakness tend to imply higher reserve growth in asia.
that at least is my view — i am interested in other opinions.
Brad, your gut feeling on Chine export growth should be right.
China Jan-Feb 41% export growth & US$39b trde surplus is definitely distorted by S-T capital inflow disguised as trade
we estimate as much as US$10b of Jan-Feb US$168b export could be due to S-T hot money inflow. Since 2H 2006 we estimate up to US$40b S-T capital flow into China through trade flow
PBOC is probabaly aware that further acceleration of Rmb is spurring hot money, however they probably could not stall Rmb move for long, not ony because increasingly belligerent US congress but also China rising inflation.