Brad Setser

Follow the Money

Cross border flows, with a bit of macroeconomics

A story that should have been written six months ago? US export growth sure seems to be slowing ….

by Brad Setser Wednesday, May 16, 2007

The New York Times – in a big front page story on Monday– reported that the US trade deficit is about to head down.   

The story presumably had been in the works for some time.    It is filled with quotes from distinguished economists indicating how the US slowdown combined with strong growth elsewhere in the world – especially in conjunction with the dollar’s fall – is set to bring the US trade deficit down. 

Their basic argument makes a great deal of sense.  Most of the conditions for an adjustment are in place.   If I had been told a year ago that US growth would slow relative to global growth and the dollar would fall to around 1.35 v the euro, I too would have expected an improvement in the trade deficit.

There is just one small problem: the q1 data hasn’t really been consistent with the “adjustment that will bring the US deficit down is about to start” thesis.  

US export growth has clearly slowed.    Y/y growth is now around 9%, well below its peak at 16% last fall.  Haver's data on the 3m and 6m growth rates in real exports show an even sharper slowdown.  

And in March non-oil imports jumped up.  They are now growing at a y/y pace of around 6%.    If those export and non-oil growth rates are sustained – and if oil stays at its March price of $52 a barrel – the US trade deficit would fall, but only by a tiny amount.  If non-oil imports grow by 6% (y/y) and if oil is stable, any rate of export growth above 8.5% would bring the deficit down.    9% barely makes the cut. 

Unfortunately, the US oil import bill is likely to rise a bit.   

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The great oil spending spree of 2006 (and 2007)

by Brad Setser Wednesday, May 16, 2007

I am a fan of the IMF’s new regional outlooks.   They generally provide more timely – and more topical – information about the major regions of the world economy than either the WEO or the country level Article IV reports.    

The most recent IMF Regional outlook for the Middle East and Central Asia confirms something that I have suspected for some time. 

The oil exporters started to spend in 2006.  As Dick Cheney might say, big time.

Texas — an oil state of sorts — seems to wants to get in on the act, too.  Ski DubaiSki Dallas.

The increase in oil spending was implicit in the relatively small increase in Saudi Arabia’s current account surplus in 2006.   But the IMF’s regional outlook provides the confirmation. 

From 2002 through 2005, about 55% of the increase in the GCC’s total export revenues was saved and only about 45% was spent or invested.   Export revenues went up by $243b.  The current account surplus increased by $135b.   The "savings" ratio would be higher if non-oil exports are stripped out.   In 2006, that changed.  GCC export revenues increased by about $85b.  However, The GCC’s current account surplus increased by only $17b.   Roughly 80% of the 2006 increase in exports was spent and only 20% saved.

As a result, the GCC’s overall 2006 current account surplus came in at $176b — well below the IMF’s initial projections.

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Thank you, China and Brazil. Russia and India, please pull your weight.

by Brad Setser Tuesday, May 15, 2007

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. 

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More evidence the world economy isn’t really rebalancing

by Brad Setser Monday, May 14, 2007

The current account surplus of the world's big oil exporters is now falling.   At least that is what the IMF believes, with good reason.   All the oil exporters ramped up their spending and investment last year. 

But rather than reducing the US deficit — my read of the latest US data is different than that of the New York Times(more on that later) — the fall in the oil surplus seems to be leading to an increase in Asia's surplus.

China's q1 surplus is up.  Japan's q1 surplus is up too.  

Japan's March current account surplus was close to $30b (more from the FT).  $30b strikes me as rather large.

The rise in Japan's income surplus isn't really a surprise.    Global interest rates are rising and Japan is a big net creditor.   The coupon the US Treasury pays MoF on its large Treasury holdings has risen steadily as debt bought at low rates in 2003 and 2004 is refinanced at higher rates.  That has implications for the US income balance and the US current account deficit as well.

The rising income surplus could have been used to finance a rising trade deficit.  But Japan's trade surplus is also rising.   The income surplus is just financing larger capital outflows.

The rise in the trade surplus isn't exactly a surprise either.   Japan's soaring commodity import bill has masked the increase in Japan's manufacturing surplus over the past few years.   While oil isn't exactly low, it isn't rising like it did in past years either.  

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When will China’s government start begging Chinese savers to move some of their money abroad …

by Brad Setser Sunday, May 13, 2007

There is still a perception – though it is perhaps less widespread than it used to be – that Chinese savers are desperate to get their money out of China, if given half a chance.   That perception shows up in various guises, whether in the argument that “we don’t really know what would happen to China’s exchange rate if China liberalized its capital account and let the exchange rate float” or in the argument that “China’s government is building up foreign exchange on behalf of its citizens.” 

Best I can tell the evidence supporting this line of argumentation is pretty thin.   Last I checked, Chinese household dollar deposits were falling relative to RMB deposits.  And China’s savers didn’t exactly jump at the chance to buy foreign bonds through the qualified domestic institutional investor program.    Bloomberg reports

“At the end of November, Chinese banks sold less than 3 % of their quota for QDII funds, which are limited to investments in bonds, money-market products and fixed-income derivatives.” 

Those meager outflows hardly helped reduce pressure on the central bank.   The PboC isn’t all that much more keen on US and European bonds than Chinese savers.  It would prefer to scale back the pace of its reserve growth.  That is one reason why China’s government agreed to allow QDII investment in equities, not just bonds.     

Now it is true – at Lex notes — that the real yield on deposits in China’s banks is pretty meager – real interest rates on deposits are currently negative.    But that doesn’t necessarily make dollar or euro deposits or bonds more attractive. I agree with Stephen Jen here.  He writes in his most recent note:

There is little interest among Chinese investors in investing in overseas fixed income instruments − partly because of the 15% monthly return on Chinese equities and 15% annual return on properties, but partly because of cultural reasons (Chinese investors prefer stocks, not bonds )

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Rising deficit in the US; rising surplus in China

by Brad Setser Friday, May 11, 2007

 The US released its March trade data yesterday.   The US trade deficit widened.   And as Menzie Chinn accurately notes, it wasn't just oil.   The non-oil deficit also widened.   Exports bounced back a bit from February, but the pace of growth still looks to me to be slowing.  Y/y exports were up 9% or so.   And non-oil goods imports jumped up — the y/y increase in March was close to 6%.   Those numbers imply ongoing deterioration in the non-oil deficit.

The rise in oil imports stemmed more from an increase in the volume of imported oil than an increase the oil price — the March oil import bill was no higher than the January oil import bill, and remains well below its peak levels from last summer.  The average price of imported oil was only $53 in March, just a bit higher than the average price in January (see Exhibit 17).   The US oil import bill could rise further in April. 

China also released its April trade data, along with data on its 2006 current account surplus.   The April (customs basis) trade surplus came in at $16.9b — with 26.7%  y/y export growth offsetting 21.2% import growth.   The 2006 current account surplus was $250b — a rather large number, though one in line with my expectations.

The 2007 surplus looks to be substantially larger.  If the April pace of increase for imports and exports is sustained for the entire year, the (customs) trade surplus would come in at around $270b, an increase of $90b from the nearly $180b 2006 surplus.   Take the average y/y increase from the last three months (28.5% for exports, 16.2% for imports) and the surplus would come in at $325b, and increase of nearly $150b.  

No wonder Stephen Green of Standard Chartered is now predicting that China's 2007 current account surplus will approach $400b, and its reserves could increase by as much as $550b.

The US data suggests that exports are still growing, just at a slower pace than in 2006.  The fall in the dollar/ RMB over the course of 2006 seems to have done more to help China's exports than US exports.

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Central Kansas, not central park

by Brad Setser Monday, May 7, 2007

My plans have evolved slightly, so I am going pretty much directly from England to central Kansas (i.e. tornado land).  In practice, that I means I probably won't be able to resume regular posting until I return to the east coast later this week.  My apologies.

I am sure Macro man (and others) will keep everyone abreast of the latest developments in the fx market.  And Dr. Roubini always has lots to say. 

Please use the comments to discuss (politely) any economic development that catches your eye — or any that you think should catch my eye when I will have more regular access to a computer.

Another month, another $10b (or more)

by Brad Setser Saturday, May 5, 2007

The $10b a month club came through in April. 

Brazil’s reserves: up $12.3b in April. Bacen also did a $3b reverse currency swap – its largest ever – last week.   It isn’t just intervening in the spot market.

Russia’s reserves: up an incredible $30.3b in April.  Maybe $4b of that comes from “valuation gains”; it is mostly real.

India’s reserves:  up $5b or so in April, with a bit over $2b of that from “valuation gains.”  And India has scaled back its intervention, big time, after the huge blow-out in its reserves in February.  The rupee is up sharply.

We won’t know much about China’s April reserve growth for a long time, but Jon Anderson of UBS notes that the pace of sterilization suggests that the strong pace of reserve growth in the first quarter continued.    Remember, the first quarter was really big – over $40b a month on average.

The second division of reserve accumulation held their own as well. 

Korea’s reserves were up $3.35b in April. Some of its “investment profits” may stem from the currency market – the BoK is high on my watch list for central banks that may be diversifying. 

Saudi Arabia won’t report its April reserves for a while.  But Saudi's March reserve growth was strong, as oil prices rebounded.

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No need to worry — the US isn’t going to run out of assets to sell to foreign investors any time soon …

by Brad Setser Tuesday, May 1, 2007

In a comment in the Financial Times about ten days ago, David Hale argues that there is little need to worry about either the dollar or the US current account deficit.   The US has no shortage of financial assets to sell the world, and the world has no shortage of savings to lend the US.

True enough.   

The question is whether the rest of world – or, more precisely, private investors in the rest of the world – want to lend that savings to the US and in the process buy US financial assets in the process.    

Right now, in my judgment, the data says that they don’t.     That is what currently worries me. 

Best that I can tell, there has been a very significant fall off in private demand for US assets over the past two quarters.   By private demand I mean net private demand – that is foreign demand for US assets relative to US demand for foreign assets.  

The US hasn’t noticed this fall off because foreign central banks have stepped up their purchases of US assets dramatically, offsetting the fall in private demand. 


The difficulties distinguishing private and official flows, along with lags in the data, make it hard to point to a single data point that illustrates the fall off in private demand.   It is easier, in fact, to demonstrate the surge in official demand, since the US TIC significantly overstates private flows and understates official flows (The growth in official holdings reported in the last survey suggests that official flows were about $140b larger than reported in the TIC data). 

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