Thank you, China and Brazil. Russia and India, please pull your weight.
China increased its US holdings by 52.5b in the first quarter (a $200b annual pace). China bought a lot of everything, but more Agencies than anything else.
That almost certainly understates China’s true purchases. Chinese flows in the TIC data were about $90b less than the flows implied by the Treasury’s survey of foreign portfolio holdings the last two years. Some bonds bought in London and Hong Kong were likely bought for China’s accounts.
Brazil increased its US holdings by $23.1b in the first quarter – with almost all of its money flowing directly into the Treasury market.
Russia came in at a mere $6.3b (mostly in Agencies, as usual). That isn’t much, given the increase in Russia’s reserves.
India came in at $6.1b, all from rising short-term claims.
Russia and India are diversified. Brazil and China are not. It is safe to assume that Russia and India were big sellers of dollars for euros and pounds in q1.
That isn’t really much of a secret. Russia told us it diversified in the first half of 2006, and Brazil supposedly reports a high dollar share in its target portfolio. It isn’t all that hard to figure out that India holds a lot of pounds or euros. As for China, well, it takes a bit more work – but I am pretty confident it holds around 70% of its assets in dollars.
In total, the BRICS and the Gulf – the “Asian oil exporters chipped in $10.5b in q1 — provided the US about $100b in financing in q1, according to the TIC data ($98.5b to be exact). It is safe to assume that almost all of its came from their central banks and oil funds.
Actually, the $100b in financing almost certainly understates their actual financing of the US. Remember that China’s reserves went up by $135b in q1 … It alone could have provided $100b.
There is another clue. The TIC data reports total official inflows of $86.7b in q1 (see line 32). 10.6b of that is corporate debt and another $22.4b is bank deposits. Total holdings of long-term Treasuries, long-term Agencies, T-bills and other short-term negotiable instruments (a category that includes short-term Agencies) increased by $52.6b (lines 10,11, 25 and 28).
But the FRBNY’s custodial holdings of Treasuries and Agencies increased by $127.6b between the end of December and the end of March.
$75b is a rather significant difference.
The Treasury usefully explains how such a discrepancy is possible:
“The TIC system of monthly net purchases or sales of long-term securities is specifically designed to capture only U.S. cross-border transactions. If a foreign official institution acquires a Treasury security from a private foreign entity on a foreign securities exchange and then has the security held in custody at FRBNY, reported custody holdings will increase. However, there will not be a corresponding TIC-reported foreign official purchase because this is not a U.S. cross-border transaction: it is a foreign-to-foreign transaction. Note that when the Treasury security first was acquired by the private foreigner, there would have been a U.S. cross-border transaction reportable in the TIC system but it would not be recorded as a foreign official purchase, nor would it necessarily be recorded in the same calendar month or against the same country as the movement into custody at FRBNY.” (Emphasis added)
It is safe to say that a lot of the UK’s purchases of Treasuries are done for official institutions. Every survey over the past few years has led to a big downward revision in the UK’s holdings (and an upward revision in China’s holdings) – look at the data for June.
And I think it is also safe to assume that total official flows to the US in q1 totaled at least $161.7b, if not a bit more. $161.7b is the rise in FRBNY’s holdings plus the change in deposits and other non-custodial liabilities and increase in official holdings of corporate bonds from the TIC data. No double counting.
That is a lot. And it may still understate total official flows. My own estimate of dollar reserve growth – one derived from my estimate of total reserve growth — is running closer to $200b.
The other story in the March data? The big rise in US purchases of foreign securities. US residents bought about $40b of foreign securities, including an usually large amount of foreign debt — $32b.
That is one reason for the dollar’s weakness.
It also explains the weak total TIC flow number in March. The $100b in headline foreign purchases of US debt and equities is deceiving. Net inflows were a bit under $50b – less than the March current account deficit ($75b or so)
If sustained, that level of “diversification” by US residents implies rather large outflows – about $500b a year. To finance that level of outflows and its current account deficit, the US would need to attract about $1400b in inflows.
That is a lot. It might imply the US would need a bigger credit line than even the People’s Bank of China is willing to provide. Financing the United States current account deficit is one thing. The current account deficit is the counterpart to China’s current account surplus (read export jobs). Financing capital flight (i.e. portfolio diversification) by US residents is another …
Two small additional notes.
-
Korea remains on my diversification watch, but the evidence isn’t clear. Its (net) sales of long-term bonds in q1 were largely matched by a rise in its short-term claims. It, though, clearly is shifting away from Treasuries toward higher-yielding instruments.
-
Norway continues to complicate the data. It sold $22.4b of long-term US debt (mostly treasuries) while adding $17.1b to its short-term claims. Or so the TIC says. In reality, this is probably tied up with some complicated options strategy designed to increase Norway’s income from its (relatively small) true holdings of US treasuries.
just noticed a rather large revision for 1Q’06 (looking at net TIC flow - line 30), but what 1Q added, 2Q took away…
…………..orig…….rev…
1Q’06…274590..430348
2Q’06…338632..182874
3Q’06…242141..242139
4Q’06…183474..183977
1Q’07……………..232061
anyway 1Q’07 looks to have covered the CAD, and so it goes…
US Dollar hegemony is fraying at the edges. The smaller Central Banks have more than enough of their share of US dollars from the massive current account deficit. For the larger Central Banks of China and Japan, either they up the ante or fold. Excess US dollar liquidity is rapidly destabilizing the Chinese economy with numerous asset bubbles. The massive dollar spewing liquidity from the US current account deficit has likely gone beyond any point of control. It’s a forgone conclusion that the US Dollar will continue its plunge versus a basket of global currencies and industrial commodities. Until the United States reorients its economy into saving and investing, the recent US dollar weakness is only a pitstop to its ultimate collapse as the world’s reserve currency.
Monthly capital flows to U.S. fall back in March
http://www.marketwatch.com/news/story/monthly-capital-flows-us-fall/story.aspx?guid=%7BF8EED518%2DD71A%2D4369%2DB25A%2D9F3BD5A3A96D%7D&siteid=yhoof
Capital flows to the U.S. totaled $45 billion in March, down from $101.5 billion in February. The number includes short-term securities like Treasury bills, and is below what’s needed to finance March’s $63.9 billion trade deficit.
Official investors like central banks, meanwhile, bought $12.6 billion in government agency bonds, three times the amount they bought in February.
U.S. residents bought $40.3 billion of long-term foreign securities during March, the data showed.
well it doesn’t have to… (again) i think it’s a matter of what can you exchange those dollars for. if only for more (different kinds of) paper, then yeah it’s easy to see the whole thing/edifice coming to an end.
but what if you swap all those agencies etc. for real estate (we saw what happened with what japan did during the 80s - golf courses and trophy buildings weren’t such great ideas) or even industries?
say the investment fund of china (IFoC) w/$300bn hired the ’smartest guys in the room’ and bought goldman (at a ~50% premium for around $150bn), what would they then do with a low (and maybe negative real) yielding bond portfolio (of potentially trillions)? what would give them the biggest return on investment and, perhaps more importantly, still be legal, i.e. allowable by congress, on their remaining $150bn? (and 10x that amount if they did a good job)
maybe you build your own capitalist playground? (to get around congress)
i dunno… i’m no goldman or buffett, or some genius hedge fund manager or politically super-connected private equity group, but i think that’s the way one needs to look at it, and indeed (i believe) the way the chinese (and the saudis etc.) are approaching their reserves.
everything they touch is turning to gold, but like midas, all that gold is beginning to lose its lustre…
macroman thinks the best thing they could do is build a better social safety net; it’d be harder to measure the ROI (it’d be something more like ‘utility’ returns on investment), but then maybe other consultants are needed, like i think the gates foundation is doing innovative work in this area… maybe a ‘manhattan project’ for clean/green fuels/energy? they wouldn’t even have to do anything, just offer prizes
cheers!
So this is China’s idea of diversification, eh? Diversification my sassafras, LOL. Just as the US gets to choose who heads the World Bank and the EU who heads the IMF, I think it’s high time that China should choose the US Treasury Secretary.
The Chinese don’t seem to play power politics very well at all with the US. After the US slaps all sorts of trade measures against China and denies it from buying US companies, what does it do? It buys more MBS and Treasuries! Such a fearsome response. Where is China’s pride when it repeatedly gets kicked in the nuts by Uncle Sam and still participates in the fool’s bargain of accumulating $? For China’s sake, I hope there’s a method to the madness since its “Drunken Master” style of dealing with America is getting boring.
they basically did w/ paulson
and they could eventually get corzine in as prez!
but yea, if they continue to act like dupes they could soon find themselves the victim of selective default…
Emmanuel / Guest
“tao guang yang hui”
Maybe someone with a knowledge of Chinese could chime in on the meaning of these words. They were apparently used by Deng Xiaoping in relation to China’s position and strategy in the post-soviet world. The translation I’ve read is ‘to put your brightness in your quiver behind your back and then to nourish your capabilities secretly. The official Chinese translation is “bide our time and build up our capabilities”‘
China Rules Out Major Currency Moves Ahead of Washington Talks
http://biz.yahoo.com/ap/070515/china_us_trade.html?.v=4
BEIJING (AP) — Chinese officials on Tuesday ruled out major changes demanded by U.S. lawmakers in Beijing’s currency controls ahead of a high-level meeting and called on critics in Congress not to politicize trade disputes.
A senior Finance Ministry official said China wouldn’t permit a backlash against financial markets and its “harmonious society,” using Beijing’s term for efforts to spread China’s new prosperity to its poor majority.
is that like sun tzu or something?
i prefer lao tzu…
Emmanuel,
I couldn’t agree more. I think China is frozen with fear. Things have gotten out of control and they don’t know what to do, so they do nothing.
i just saw a chess/mahjong comparison
i know i’d prefer EM debt to high yield!
hey, this sounds familiar…
The Case for Revaluation: Authorities dismiss the revaluation of Gulf currencies, but the case is getting stronger. The petrodollar liquidity has unsurprisingly led to a marked increase in inflation. The dollar’s weakness has worsened inflation pressures in the Middle East. The realignment of currencies would help convergence and global rebalancing.
also btw - China 1Q Monetary Policy Report: Be Prepared for Rate Hikes…
Hi Brad,
It seems there are no new ideas (gillies clever comments apart).
This is the end… (Do you remember Apocalypse Now? The boat entering the uncharted territory… with J. Morrison singing…).
If half of the budget goes to military expenses (military and war costs, and all the expenses of those military injured in any kind of healthcare section… )
Do the Chinese do so much to see with the economical mess of USA?
The bifurcation of financial and real economics is so high?
Or the financial part of economics is getting what they were looking for, at expense of who? China?
Beware of China’s answer…
Hummm!
Thankyou for the update
Tis true that I strongly agree with Cevik’s arguments about the Gulf currencies.
It isn’t quite the end tho. the fat lady (the PBoC) hasn’t yet sung … there are plenty of signs that the scale of reserve growth is getting hard to manage. In china (see the stock market). And in Brazil (note the debate in the RGE latam blog). But no one has been prepared to take the kind of decisive action needed to really change the current situation. they instead have stood still even as the costs of the status quo have risen.
so DC is BS i presume
aha!
Emmanuel
Why should China change its current policies? It just works very well. Why should they worry about how many trillion USD reserves they have. Even if they burn that money literally, that would not change the fact that in the past 30 years China emerged from the middle ages to the current situation, where there are more middle class people there than the entire population of the US. If I were China, I would say just go ahead like this, and don’t worry about the reserves. It is funny, that the US doesn’t worry about its huge debt, but China should worry about its reserves. As I see it, currently China is trying to take export markets, especially in the EU (after they finished off the US). The best way to do that is to keep pegging to the dollar, while it slides against the euro. Another key element in China strategy might be to attract FDI in high(er) tech industries. The Chinese workers learn how to make cars, wide-body airplanes, microchips, etc. then in the near future they will move on to work in/found Chinese factories in the same field, and make those things better and cheaper. It is happening now in cars. The next five-year plan gives high priority to the preparations to become able to produce Chinese-made wide-body aircraft and microprocessors. Knowing the past, it can mean that within 10 years we will have a Chinese Boing and Intel.
is there a conspiracy to silence gillies? i feel like part of a supersekrit underground ‘chess/mahjong’ club…
Why should China change its policies? Because at some point, the disenfranchised/displaced in the US and Europe will exert enough political influence to ensure the passage of protectionist legislation which eventually WILL hurt China’s interests (as well as those non-disenfranchised members of the US and Europe.)
I don’t think anyone begrudges China’s elevation from the ashes, but by the same token China should realize the impact that it is having on segments of its customer base and be aware of the potential consequences…
Spain risks crisis over vanishing reserves
Why Is Capital Flowing Uphill? Why Does it Matter?
Gillies — my apologies for the comment that disappeared. I think RGE has a spider or something that automatically takes down any comment with the word “p..ker” in it. All, be forewarned.
Macro Man
OK, but if the US introduces some sort of an import tax against China, it will hurt not just China but the US itself also, because inflation would certainly rise. Or do you think that other countries could easily replace China as importers of goods at such a low price level? Also: China may introduce the same tax against US goods, which would hurt US companies like Boeing.
AC, that is my point. If mercantilism persists, the body of disenfranchised (i.e., unemployed manufacturing workers) in the West will be sufficiently large that policies may be enacted that harm not only China, but those benefitting from the current regime (i.e., large buyers of consumer goods, corporatons, and owners of equities.)
While China may well respond with tariffs of their own, the very fact that there is a large imbalance of trade suggests that the impact of tit-for-tat tariffs may be disproportionate. There are plenty of textile mills in Latin America, Bangladesh, and Vietnam that would just love to take China’s place as clothesmaker to the world (or at least to the US.)
I am always a bit worried by these ideas about countries “pulling their weight” - I presume that this means that they are supposed to consume more and therefore have a trade balance closer to zero. I doubt whether the environment could withstand a levelling up of consumption. What about the Greenhouse effect, pollution, limited water and commodity supplies etc?
“pulling weight” = reference to contributing to the central bank cartel financing the us … india and russia, by virtue of their low dollar share, provide less financing to the us per unit of reserve growth than china and brazil.
Oh I see, you were being ironic! Sorry. I was trying to introduce something different into the debate about global imbalances that usually develops whatever the starting point!
if the environment cannot stand a leveling up in consumption, we are in trouble — i don’t think china and india will happily accept the current global distribution of consumption (reasonably so) over time, so consumption has to fall in the us and europe …
fwiw, china’s been consulting with the likes of william mcdonough and RMI, asking questions like:
“Does China have to follow the historical path of the West to prosperity, via pollution-intensive industry? Or can it leapfrog past the United States and other countries to a future that is clean, efficient, and provides a quality of life they all aspire to? And can we really continue to assume that environmental needs come second, rather than being intertwined with basic human needs for survival, like clean water and air?”
more from worldchanging…
What the politicians want and what factory operators deliver are, alas, not always the same thing. Evidently the authorities calculate a ‘green’ GDP that measures what economic growth would be if everyone who had chimney scrubbers, etc actually used them- the figure I was quoted was 8.5% y/y, substantially lower than the 11% delivered in Q1….
Why Populists Need to Re-think Trade
Exporting I.P.
the deleted comment was to the effect that chinese policy may seem inscrutable because the chinese unconsciously use the game of ‘go’ as a metaphor for the policy game while americans use p*k*r - this may sound trivial but recently published research also shows differences in oriental and occidental peoples’ visual attention. we in the west are more sensitive to the focus or target - those in the east are more aware of the background or context. it comes right down to rods and cones in the back of the eye in fact, and mental processes.
the chinese are not coming up with inscrutable answers, perhaps, so much as seeing a different question.
i think that the chinese may have a very long term perspective - but to come back to another point, we have to be aware of how little we know of their day to day decision processes. freedom of speech and information are a vital aspect of smoothly functioning capitalism ?
yes, we are in trouble. for the chinese population to consume ( . . . . . ) at an american level of per capita consumption would require more ( . . . . . ) than exists in the world. you can fill in the gap with quite a number of commodities and products. there is a lot of talk about ‘peak oil’ but if arable land can be used profitably for biodiesel crops then there is linkage and ‘peak oil’ translates into ‘peak food’. arable land per capita has been in steep decline for forty years. increasing use of oil in fertilising, processing, and transporting food has been making up the shortfall.
nature is always in balance. and the earth has limits. she sets the limits - how we divide up a declining store of oil and arable land is not her problem.
How to curb Asia’s towering energy demand
The novelty of air-conditioning has stoked a perverse desire to fight the natural climate.
We need an International Carbon Fund
The Keynesian answer to climate change is to create an institution - like the IMF - to let market forces find a solution.
Why it takes small groups to solve global problems
We should adopt a more contingent approach to world economic problems through groups brought together issue by issue.
China’s great walls cannot keep out the world forever
Nowhere was it harder to come to terms with the impact of western power, ideas and technology than in the world’s longest-lived imperial civilisation.
“…capitalism as practiced in the U.S. is different from the capitalism practiced in, say, Singapore or Saudi Arabia. ‘Capitalism…takes many forms, which differ substantially…in their implications for economic growth and elimination of poverty,’ three economists write in ‘Good Capitalism, Bad Capitalism.’ The book identifies four strains of modern capitalism and argues the U.S. version is particularly well-suited to creating and exploiting innovations that boost living standards…” http://online.wsj.com/article/SB117876244839698008.html
“There can be no doubt that certain human rights exist in Singapore, and to its government’s great credit. But I should not have been embarrassed to tell my cab driver that it is a nation that now needs, and deserves more. And one that will not attract back the people it has lost until it does so. Because if its people with their hard won knowledge and skills do not feel the need to articulate their expectations for their country’s future and a greater place for their rights in it - now that there is the time and space for the individual, now that the battle has been won - the great Singapore experiment would have failed. And the past sacrifices made for its present, rendered meaningless.” http://3quarksdaily.blogs.com/3quarksdaily/2007/05/singapore_notes.html
Thanks you Brad for this excellent blog and your hard work, and thanks to gillies for his clever comments.
I’m not an economist, but it’s not so difficult to see that the future has to be not in growth, but in reducing demand. Not just for global warming, but for sanity (And global rebalancing, of course :-).
The West has lost control on “supply side” in energy. Rogue states are owning our energy… the energy of our future… We have to send Condy to Asia… or to Chavez!
We can’t ask the others to do what we won’t do, by army. Just by money, for some time. Not for long. They learn fast!
We have in front of our nose several big problems… peak oil, peak land, peak water, peak food… Just a look to statistics is enough. But everybody is waiting for “peak Dow Jones or NYSE” to shake their heads, nothing else matters…
But if the top ten riches show-off their high standing while the other 90% is feeling very-very poor, we’ll have some little new revolution in USA, Wolfowitz, Cheyney or Bush aside.
China will be just a colateral risk!
Good night!