Putting the BRICs cash to work ….
Foreign central banks custodial holdings at the New York Fed rose by close to $12b last week, with over $4b in Treasury purchases. Combine that data point with the fall in Treasury yields, and it seems reasonable to conclude that foreign central banks found Treasuries more attractive at 5.2% than at $4.8 or 4.9%. Anecdotes suggesting that central banks jumped back into the market early this week seem true.
The trouble over at two Bear Stearns hedge funds (well chronicled by Naked Capitalism) also may have contributed to the fall in Treasury yields this week.
One thing seems clear: central banks still have a lot of cash to play with, cash that has to go somewhere. Brazil has resumed releasing its reserves data in a timely way, so we now know Brazil's reserves increased by about $15b ($14.6b) in May.
If China added $38b to its reserves in May — $38b is my estimate for the valuation-adjusted increase in China's April reserves — then the BRICs added a record $95b to their reserves in May. That is up from around $70b in March and a bit less than $80b in April (all data has been adjusted for valuation effects).
The BRICs are not the only emerging markets adding to their reserves at a rapid clip either. Some small Latin countries are doing their part –as, for that matter, are many smaller Asian economies. Thailand and Malaysia, I am thinking of you …
Global reserve growth likely far exceeded $100b in May. Central banks have to be buying a lot of something.
The pace of reserve growth does seem to have slowed slightly in June. The bond market turmoil in the US seems to have led some investors to scale back their investments in emerging economies, at least somewhat. The pace of Russia's reserve growth has slowed noticeably in June. Brazil though is still intervening — its reserves are up $7-8b in the first three weeks of June. That is a strong pace, even if its slightly off the record pace of May. India continues to intervene as well: its reserves are growing by $1b to $1.5b a week.
As for China, well, we don't know. But it is safe to assume that it continues to add to its reserves at an impressive clip. The Economist (still) isn't convinced the RMB is undervalued, but it is quite clear that the market only balances at the current price thanks to huge PBoC purchases.
Not all these reserves flow into dollars. Russia and India only keep around 50% of their reserves in dollars. But China likely keeps a bit over 70% of its reserves in dollars — and Brazil keeps an even higher fraction of its reserves in dollars.
Not all these reserves flow into long-dated Treasuries and Agencies either, even in good times. India prefers bank deposits to securities. Russia for some reason holds short-dated Agencies rather than short-dated Treasuries. it may be dabbling a bit with some longer-maturities, but the stabilization fund's guidelines suggest that it remains concentrated at the short-end. Brazil though has been putting all its funds into Treasuries — and not just into bills. And then there is China. It clearly has been putting a higher fraction of its reserves into Agencies. Still, if your reserves are growing by around $40b a month, you don't have to put all your reserves into Treasuries to be a big buyer (in aggregate) of Treasuries.
China's total reserve growth still year will clearly top the net issuance of Treasuries. I suspect we may have gotten a taste of what might happen in the bond market if China really stopped buying over the past couple of weeks. Just a guess though. China clearly didn't sell. But it does seem to have preferred bills to bonds when rates were rising …
wsj this weekend so far has the definitive account of the bear hedge funds’ dissolution. what’s great is after spending the majority of the article on the less levered (and troubled) of the two, it concludes (alarmingly):
“With the funds’ standing deteriorating, Bear also saw an opportunity: come in with a larger loan to prevent a fire sale of their assets. Such a move could help stabilize the assets’ perceived value and prevent widespread markdowns of similar securities that would hurt Bear and others.
“Mr. Spector worked the phones Thursday afternoon, reaching out to various CEOs and senior Wall Street executives, according to a person familiar with the matter. The upshot: save the less leveraged fund that had better-quality assets and let the other fund collapse.”
what!? that’s it??
[*checks nakedcapitalism.com, notices same reaction; feels less alone in my incredulity* :] looks like a job for tim geithner! …or bernanke to the rescue mayhaps?
um, so, trying to stay OT and bringing it altogether, if foreign CBs are holding the proverbial sword of damocles over the US economy and debt markets by effectively controling LT interest rates [*searching, reaching*] does that mean hilary clinton is right?
“Senator Hillary Clinton, a New York Democrat running for president, said in a Feb. 28 letter to Treasury Secretary Henry Paulson and Fed Chairman Ben S. Bernanke that foreign ownership of `nearly half’ the U.S. debt was `a source of great vulnerability.’ The economy `can too easily be held hostage to the economic decisions being made in Beijing, Shanghai and Tokyo.’”
“Clinton backed legislation proposed last year by North Dakota Senator Byron Dorgan and Benjamin L. Cardin, then in the House of Representatives, calling on the administration to respond when foreign ownership of Treasuries reaches the equivalent of 25 percent of gross domestic product. The $2.19 trillion of government debt held abroad was equivalent to 16 percent of the $13.6 trillion GDP as of March 31.”
btw for all you PKD fans (dickheads) out there julian dibbell’s piece on chinese gold farms was pretty ‘entertaining’ as an example of how surreal at times the world has become
cheers!
06.19.07 - “…Bear will meet again with creditors today to hash out the rescue plan… In addition, The Blackstone Group is getting in on the action. Reuters reports that the private equity firm will present a rescue plan on Tuesday as well. The firm declined to comment on its rescue efforts.” http://www.finalternatives.com/node/1922
06.22.07 - “Shares of the Blackstone Group LP soared more than 20 percent Friday on its first day of public trading, as the company’s market value reached about $40 billion… Blackstone said it intends to use a portion of the proceeds, along with the concurrent sale of $3 billion of non-voting common shares to a Chinese investment firm, to purchase interests in its business from its existing owners, repay short-term borrowings, provide capital to invest in its existing businesses and expand into new businesses and for other general corporate purposes…” http://news.moneycentral.msn.com/provider/providerarticle.aspx?Feed=ACBJ&Date=20070622&ID=7073766
China’s $3 billion toe in the water with Blackstone is looking very wily. The distressed securities fund stays at arm’s length for extra ruthlessness and shorts high-yield debt — just the thing for an investor that’s long quality assets in a problematic market. China couldn’t possibly short enough to materially cut their beta, of course, but capacity for shorting and deep value will be nice as spreads widen. The long positions reward patience with diversification: mezzanine debt of middle-market companies with warrants and stuff for optionality, CDOs backed by senior secured loans. The equity fund gives energy exposure including oil tankers protected by Jones Act cabotage restrictions and West African offshore oil exploration. The exit strategy for holdings like that won’t matter much to China. Blackstone almost seems tailored for flush sovereign investors with access problems. It wouldn’t surprise me to find out that the IPO is just legitimating cover for a portfolio that was meant for our sovereign creditors all along. Wait till Carlyle opens the kimono, we’ll see what our strategic rivals covet most.
psh — could you spell out your thinking in a bit more detail? i get the carlyle bit — that would indeed be interesting, especially if it became clear just much gulf money has been invested there.
I see that china is long lots of quality assets — notably agencies and treasuries. but i don’t see how shorting high-yield debt helps China — at the its problems don’t stem from its credit risk exposure do much as its dollar exposure (best that i know — my general sense is that the pboc has been a big buyer of mbs with an agency guarantee and also dabbled in mbs w/o a guarantee at the upper end of the credit spectrum). but i have a sense that i haven’t quite deduced your thinking …
“…A consequent risk is that the equity market will experience something similar in corporate governance to the collapse in lending quality that has afflicted credit markets… In fact, argues Mr Plender… this is already happening… the reality is that the Blackstone IPO currency is no more than junk equity”, and the prospectus “represents a low point in US corporate governance”. The conclusion might be that this $3bn investment for China is “peanuts” and that good governance at Blackstone matters less to the Chinese than obtaining access to US intellectual capital and management skills for use in their own fledgling private equity sector. “The message, once again, is that China’s role in globalisation brings costs as well as benefits…” http://ftalphaville.ft.com/blog/2007/06/22/5387/china-blackstone-and-the-unseen-risk-in-sovereign-wealth-funds/
Hope psh is able to elaborate, but even Grant’s seems to be having it’s own challenges, given this ‘Canadian’ (didn’t Li sell his stake and give it to charity?) bank’s reaction to a recent article:
“[CIBC] denied speculation yesterday that it might have significant exposure to the U.S. subprime mortgage market… “The report is not accurate and makes certain assumptions which are simply not true; therefore it is not a reliable source of information,”…The latest edition of Grant’s Interest Rate Observer… said CIBC put $328.5-million into Tricadia CDO 2006-7 Ltd. Tricadia is technically a CDO of CDOs, or “CDO squared,”… an analyst for the newsletter, spoke to researchers who infer “the bank could own five or six structures besides Tricadia,” … A back-of-the-envelope calculation led the newsletter to say the “hypothetical” exposure could be $2.6-billion. Mr. Gertner said the exposure beyond Tricadia “is speculation at this point.”…” http://www.theglobeandmail.com/servlet/story/LAC.20070622.RCIBC22/TPStory/Business
Just that if spreads widen as US rates rise, riskier credit falls faster and short positions would be strongly negatively correlated, though nothing like a perfect hedge. At China’s current exposure it’s pin money for them, not protection, but I’d take it (and ramp it up over time, if I was them). I too presume that China’s debt is low in risk, except for currency risk, and there’s not much they can do about that. A nice sharp dollar break, though, might be just the thing to goose spreads. Now, if M. Jen’s ‘dollar smile’ takes hold and USD strengthens as times get tough and risky assets tank, then you’re swimming in your money swimming pool like Scrooge McDuck.
Thinking of references to the very large philanthropic donation Mr. Peterson is alleged to be contemplating following the IPO, interesting to think how philanthropy and endowment funds’ 60% alternative investment allowances may be allocated in these markets.
Not to ignore the other three BRICs, or at least one of the others, along with the small Latin American and Asian countries - but as they all seem to have large diasporas, if the impact of these flows should be taken into consideration. Perhaps one insight I’ve found so far is the following 2006 study on India, which starts out: “In 2006, the World Bank estimated that remittances worldwide reached a new peak of $268 billion… India accounts for close to 10% of this…” while making the point that much of India’s increase can be attributed to the more “official” channels being used. As Brazil and Russia are rarely mentioned in any of the studies I’ve seen, if this may be a reflection of a relative lack of transparency in the ways their own diasporas conduct transactions, rather than a lack of flows - whether the World Bank estimate may represent nothing more than the tip of an iceberg. But looking at the India report, and apologies for the length - I couldn’t come up with a shorter attempt to tie it together:
“…The term Non-Resident Indian (NRI) popularly refers to members of the Indian diaspora, including Indian citizens living abroad and people of Indian origin… Indian banks have established NRI deposit accounts exclusively for NRIs. These deposit schemes, which the government of India authorized in the 1970s, have been used to attract foreign capital when the Indian government felt the need to shore up its foreign-exchange reserves. To make the accounts attractive, NRI depositors are given the choice of holding deposits in foreign currency denominations or in Indian rupees. Depositors in foreign denominations can “repatriate” their principal and interest when they choose. Thus, repatriable deposits are treated like a debt…
…With the liberalization of gold imports, beginning in 1992, the incentive to employ hawala networks diminished. In 1993, the government established a market-based exchange rate further reducing the appeal of hawala networks… For the tech-savvy with Internet access, Internet-based providers have become another option for remitting money… The global wireless industry is now encouraging the use of mobile phones to remit money, especially to those who may not even have a bank account… With the Indian economy growing at an average of 8% per year… NRIs now see India as an “investment destination”… NRIs may have finally become “investors” rather than “savers”… the state of Kerala has floated a new public-private partnership company… to attract investment from nonresident Keralites for infrastructure development purposes. It is expected to raise 74 percent of its equity from NRIs…” http://www.migrationpolicy.org/pubs/MigDevPB_052907.pdf
A broader study: ‘Beyond Remittances: The Role of Diaspora in Poverty Reduction in their Countries of Origin’, already a bit dated - July 2004 - also goes beyond traditional ideas of remittances (which, I think, tend to be thought of as ‘guest’ workers sending money to their families for basic necessities) by summarizing differences in flows between some of the more significant global senders and receivers, including China: i.e.: “…It is estimated that about half of the $48 billion in FDI that flowed into China in 2002 originated with the Chinese Diaspora…” along with references to intangibles which accompany these transactions: http://64.233.167.104/search?q=cache:ZW2XTcmQuDkJ:www.livelihoods.org/hot_topics/docs/MPIDiaspora.doc+remittances+to+china&hl=en&ct=clnk&cd=5
So in addition to the challenge of capturing and assessing the impact of the of financial flows, comes the problem of trying to put a number on the associated intangibles.
Back to China. If the following deal is done, it will be interesting to watch how this works out: “Baghdad has revived a contract… allowing a state-owned Chinese oil company to develop an Iraqi oil field… Iraq has been reluctant to revive Saddam-era contracts, but seems to have turned to China as security problems and uncertainties over Iraqi investment law have deterred other investors…” http://www.ft.com/cms/s/c6c6f958-2108-11dc-8d50-000b5df10621.html
some one please answer in layman’s language (as much as possible)
what happens if:
1. BOJ keeps the interest rates low like current, and keeps supplying money for the carry trade?
2. India and china dont let their currency appreciate and keep supplying cheap exports for-ever?
3. US currency keeps losing value with other currency except for india and china (or any other manipulator)
i was thinking that as long as usa is supposed to pay in USD they can just let their currency depreciate against those who dont manipulate and let china,india and others just keep accumulating dollars worth less than the goods??
how long can it go??
i just read that New Zealnd(NZ) is having a tough time because of this carry trade since they are not able to control inflation and rising interest rate is not helping, any comments on this?
Brad,
In an earlier post you said that the apparent 1.5% decrease in China’s holdings of US Treasurys implies that China is “dumping” US T-bonds. As as lontime markets professional, I would say that you might have jumped to a conclusion here.
My guess is that some of China’s bonds were repaid at maturity and that the Chinese simply didn’t buy enough additional Treasurys at auction in order to keep its holdings constant. Had China actually been selling Treasurys, one would guess that such a world-shaking piece of news would have surfaced in the notoriously gossipy trading community, and panic would likely have ensued. I don’t think China can sell more than token amounts of its US Treasury holdings without spooking the market. However, no one forces them to show up at the auctions and keep buying.
Assuming they have a large bond portfolio with staggered maturities frequently coming due, the Chinese would have to keep buying, just to keep the aggregate principal amount constant. Maybe they didn’t show up — or maybe they did, but didn’t buy enough to replace all the bonds that had been paid off.
Interesting that these auctions categorize Russians as Europeans: “…While the weak dollar has made it attractive for Americans to sell in London, perhaps the biggest difference is… Russians and Ukrainians — some living in Geneva, others in London — have jumped into the auction game, pushing prices to record levels… Although European buyers dominated — the auction houses include Russians in that category…” http://www.nytimes.com/2007/06/25/arts/design/25auct.html?ref=arts
Sunlight –
If I ever said that China is dumping Treasuries, i apologize. I try to write lively but accurate prose, and I pretty much have been trying to tell the story you just told, namely that China just stopped buying as much as the market expected couple of weeks ago. I agree with your view that that would be enough to spook the market, and i agree with your view that China hasn’t been a big seller. And I have suggested that China started buying bills when it stopped buying bonds.
The FRBNY’s custodial holdings of treasuries did fall a couple of weeks ago, but i hope i didn’t give that too much emphasis. the FRBNY is just one or many custodians that holds funds for foreign central banks (it is the biggest tho).
techy — you ask more questions than i can answer in the comments. all are good though.
LOL:
New IMF mandate promoted by Washington Consensus inflames U.S.- China economic relations
http://www.chinaknowledge.com/news/news-detail.aspx?id=8742
Jun. 25, 2007 (China Knowledge) - The International Monetary Fund (IMF) could be snared in a tussle between two of the world’s largest economies over exchange rates and the party responsible for massive trade surpluses, said a senior official from IMF.
The situation may be imminent given the board’s adoption of a new mandate for international surveillance- a move widely seen as a hardening of rhetoric towards China’s economy. The new mandate has since inflamed U.S.- China relations and contentions between both parties seem to be showing no sign of abating.
On the other hand, China has taken up the defense and retaliated by pointing out that IMF’s surveillance would exert unequal influences on the emerging and developed economies.
Ge Huayong, China’s representative at the IMF, attributed China’s overruling to the lack of support for developed nations having the bigger voting powers in the fund. The U.S. was also said to have exacted significant amount of influence on the panel’s decision.
Bystanders have expressed uneasiness towards the fix which the IMF could land up in. Former offcials of the fund had maintained that it is not within the capacity of the global financial regulator to decide on such issues. Others are apprehensive over China’s possible backlash- such as spurning the fund and devising Asian monetary tactics to supersede it.
“…China may have repeated the disastrous errors made by Japan in the 1980s when Tokyo let rip with excess liquidity. “The Chinese economy seems to be demonstrating very similar, disquieting symptoms,” it said, citing ballooning credit, an asset boom and “massive investments” in heavy industry. Some 40 per cent of China’s state-owned enterprises are losing money, exposing the banking system to likely stress in a downturn. It said China’s growth was “unstable, unbalanced, unco-ordinated and unsustainable” - borrowing a line from Chinese premier Wen Jiabao…” http://www.smh.com.au/news/business/great-depression-fall-looms/2007/06/25/1182623823367.html
“…Jin Renqing, China’s minister of finance, will lead a delegation of senior Chinese regulators and financial sector executives to a high-level meeting at Niagara-on-the-Lake in mid-October… China remains a difficult place to do business, as analysts have warned. Regulations can be stifling. Its stock markets are still weak and respond more to rumours and speculation than business fundamentals. Partnering with, or buying, a local company is risky given substandard financial reporting practices and weak corporate transparency… Organizers hope to schedule the forum so that it occurs just prior to the Oct. 21 meeting of the World Bank Group and the International Monetary Fund in Washington.” http://www.globeinvestor.com/servlet/story/GAM.20070625.RCHINA25/GIStory/
Brad,
I didn’t mean to nitpick, and I like the combination of accurate and colorful prose. I also passed your conversation with global portfolio manager on to some colleagues, and they really liked it.
Maybe you have already answered this one somewhere but one of my trading buddies, who happens to be based in Doha, says there is “heavy rumor” about the UAE dropping the dollar peg. According to him many people there think of this as a done deal. Any substance to this one?
Guest,
Hey, blowhard. The Toyota data is up on the previous thread.
Setser, are you going to acknowledge it?
“…there was a moderate tightening of monetary policies in many countries, although overall monetary and financial conditions remained highly accommodative. In part this was due to real policy rates remaining rather low, with associated effects on long-term interest rates. But it was also due to an increased willingness of lenders to advance credit to high-risk borrowers with less onerous conditionality than in the past. While the credit cycle has peaked in the subprime mortgage market in the United States, the expansion has continued in most other areas. As a result, global asset prices either continued to rise or were maintained at unusually high levels. Moreover, financing for the US current account deficit, as well as private capital outflows from the United States, continued to be available at terms that seemed to factor in expectations of only a very moderate further depreciation of the dollar… http://www.bis.org/publ/arpdf/ar2007e1.htm
http://www.bloomberg.com/apps/news?pid=20601087&sid=aHlb_k7gVajg
Dollar `Vulnerable’ to Drop in Investment, BIS Says
Yen Gains From Record Low Versus Euro as Carry Trades Are Pared
http://www.bloomberg.com/apps/news?pid=20601101&sid=auh1NEiWSnnw
Berlin seeks to vet foreign fund deals
http://www.ft.com/cms/s/d25a3618-2342-11dc-9e7e-000b5df10621.html
http://www.bloomberg.com/apps/news?pid=20601103&sid=aGgLCqUS9XCI
Amaranth Distorted Natural-Gas Market, Senate Finds
Sunlight — rumors that make economic sense (UAE dropping its peg) are more credible than ones that don’t but i don’t know more than that. appreciate the nit-picking, on this one tho your basic argument (FCBs stopped buying rather than sold) was one that I have been trying to make, so i was rather worried that i haven’t been communicating effectively (perhaps b/c I was sloppy with my language)
July 5 is Independence Day, that’s around $225bn that could make its way overseas according to the CSRC: “Welcome, Chinese investors, to a brave new world. Thanks to another relaxation of capital controls last week, Chinese investors can now put their money into a wider range of assets, from foreign stocks to real-estate investment trusts. It’s an idea whose time has come, even if there are some big devils lurking in the details.” http://online.wsj.com/article/SB118272151385146377.html
“…the initiative, set to kick off on July 5, will help mainland securities firms work to… allow fund managers and brokerages to pool citizens’ yuan or foreign-currency capital to invest in securities abroad…” http://news.xinhuanet.com/english/2007-06/25/content_6286354.htm
“…allowing Chinese companies to sell bonds maturing in more than a year without issue-by-issue approval. That is expected to lead to a surge in bond offerings by cash-strapped companies, which until now have raised most of their financing through domestic bank loans…” http://www.financialexpress.com/fe_full_story.php?content_id=168186
Well, at least 2007-06-25 15:04:37 posted the stuff, although can’t see why he’d expect anyone to respond.