Posted on Thursday, July 19th, 2007
By bsetser
China is growing incredibly fast. No doubt net exports are contributing significantly to China's current growth. But net exports are equally clearly not the only reason for China's current growth. If net exports contributed 3% — that is just a guess, but one consistent with the data from q1 — to China's 12% growth in q2, China would have grown by a very respectable 9% even if its trade surplus didn't grow.
That is the missed opportunity. This is a time when the global economy should be adjusting.
Sure oil prices are high, but the Middle East is investing more of its oil revenues at home, supporting global demand. I don't really buy the argument that the Gulf's boom is totally different this time around. Most oil revenue is in government hands, government sponsored-investment is still the norm (and no doubt will generate some white elephants) and with the Gulf's ill-conceived dollar pegs generating negative real interest rates, government policy is creating very strong incentives for private-sector investment (and quite possibly over-investment). No matter. An oil-boom is still and oil-boom. Growing domestic spending and investment in most oil and commodity-exporting economies are contributing to global demand growth and likely offsetting most of the impact of the recent rise in oil prices.
After all, most analysis suggested that the key condition for global adjustment was an acceleration in global growth relative to US growth. That has happened. Big time. The world economy has decoupled from the US-housing slump. Yet at best the US current account deficit has stabilized in nominal terms — and it may even start to rise once $75 a barrel oil is reflected in the US import data. It should be falling.
I would be a lot happier if the combination of strong global growth — South America, Western Europe, Eastern Europe, the Middle East, India and China are all humming — and a weak dollar was leading the US current account deficit to fall by $100b a year, not pushing China's current account surplus up by $100b a year.
If the global economy doesn't adjust now, when will it adjust?
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Posted in China | 88 Comments »
Posted on Wednesday, July 18th, 2007
By bsetser
China announced that it added $130.6b to its reserves in the second quarter, only a bit smaller than the $135.7b it added in the first quarter. Most of the increase was real: if China had 5% of its portfolio in yen and 20-25% in euros and pounds, valuation gains only explain $2b of the increase; if China had fewer yen and more euros and pounds, valuation changes could account for maybe $5b of the $130b increase.
Combine strong q1 and q2 reserve growth with China's tendency to run a larger current account surplus in the second half of the year and Stephen Green's forecast that China will add $500b — if not a bit more — to its reserves this year looks pretty good.
Some of the growth in China's reserves in both q1 and q2 likely comes from the unwinding of some long-term swaps the PBoC did with Central Huijin as part of the bank recapitalization. Basically, some of the reserves that disappeared from the PBoC's balance sheet in 2003 and 2005 are returning. Logan Wright (Survived Sars) estimates that this explains $10-15b of reserve growth per quarter.
The unwinding of some short-term swaps and the repatriation of offshore bank IPO proceeds have also contributed to the very strong pace of reserve growth. Chinese residents bought about over $100b in foreign debt in 2006, and, as Denise Yam and Qing Wang note, this flow came from state institutions and likely came from state institutions playing with funds borrowed from the PBoC. Some of those loans — structured as swaps — may not have been rolled over.
Consequently the pace of China's foreign asset growth — properly defined — hasn't really doubled from 2006. But it has picked up. And it has reached truly unprecedented levels.
I doubt this quarters' data will change the minds of those who are convinced that the RMB isn't really undervalued. However, it should by now be clear that the current RMB -dollar exchange rate isn't a market outcome either.
Many are convinced that changes in the RMB/ $ won't have much of an impact on trade flows — not in the short or the long-term. But it now seems pretty clear — at least to me — that so long RMB's real value isn't allowed to change (yes, the RMB has appreciated against the dollar, but the dollar has depreciated against most other currencies) the best forecast is more of the same.
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Posted in China | 38 Comments »
Posted on Tuesday, July 17th, 2007
By bsetser
To be honest, I have a hard time understanding the May TIC data.
Overall inflows to the US were strong, obviously. Demand for US equities and corporate bonds was particularly strong, which does suggest the persistence of private demand for US assets abroad. Private investors tend to buy corporate bonds and equities; central banks tend to buy Treasuries and Agencies — though that is changing.
What causes me trouble is the split between private and official purchases, and specifically the absence of any official inflows in the May TIC data.
The TIC data has modest net official purchases of long-term bonds ($11.5b in total purchases, mostly Agencies), net official sales of t-bills (down $5.5b) and a fall in other short-term official claims. The net result: the official sector supposedly took 2.8b out of the US in May.
I have a hard time believing that. May was a record month for official reserve growth. China, Russia and Brazil all added to their reserves like crazy. Those three together combined to add close to $100b to their reserves – and a host of other countries were adding to their reserves too. That money has to go somewhere.
Suffice to say the large rise in the UK’s Treasury holdings – they rose $33.1b in May – suggests to me that the US data isn’t capturing a lot of official demand.
Moreover, the Fed’s custodial data doesn’t show a comparable fall off in official demand in May (June is another story). Between May 3 and May 31st, custodial holdings of Agencies rose by $28.45b (v a rise of $12.8b in the TIC data) and custodial holdings of Treasuries rose by $4.1b (v a fall, if bills are added in, of 10.1b in the TIC data), for a total increase of $32.55b. Add in the data from the preceding week and the increase is even larger.
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Posted in central bank reserves | 17 Comments »
Posted on Monday, July 16th, 2007
By bsetser
One of the standard arguments why the GCC currencies' depreciation – they, after all, generally peg to the dollar – won’t lead to high rates of inflation is that the GCC countries are open to both imported goods and imported labor. The ready availability of Chinese goods and imported Indian (and Pakistani) labor will contain cost pressures, allowing the GCC countries to have their version of what seems like an impossible trinity: rising domestic spending and investment financed by the oil windfall, an ongoing peg to the depreciating dollar and low inflation.
Or perhaps not. It turns out that Indian labor isn’t thrilled to be paid in depreciating dinars –particularly when the cost of living in the Gulf is going up. The rupee, after all has appreciated substantially against the dinar, the riyal and all other currencies pegged to dollar.
Rob Corder of ArabianBusiness.com:
In March 2006, every dirham earned in the UAE was worth 12.7 rupees back home. Today, the interbank rate slumped to below 11 rupees to the dirham as the weakness of the US dollar drags down the value of Gulf currencies to which it is pegged. And the fast growing Indian economy strengthens the rupee.
The 15% plunge in the value of dollar-pegged currencies against the rupee has coincided with at least 10% inflation in the UAE, and probably as high as 15% inflation in the emirate of Dubai. The wages of Indians in the UAE are therefore worth as much as 30% less than a year ago in rupee terms.All of this comes at a time when wages are growing in India, particularly in the construction industry.
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Posted in oil | 13 Comments »
Posted on Thursday, July 12th, 2007
By bsetser
My grandmother passed away earlier this week, after a long and healthy life. I’ll resume posting on economic and financial issues on Monday.
My grandmother lived to be 95 – and had the good fortune to remain mentally sharp for almost all of that time.
Her family had homesteaded central Kansas not so long before she was born, and in my grandmother’s eyes, they had settled in the perfect spot. My grandmother never strayed very far from a triangle defined by Hudson, Kansas, St. Johns, Kansas and Stafford, Kansas (not all that far from Great Bend or Hutchinson — the nearest airport is in Wichita). She was rooted to a place – to the bit of land that she and my grandfather farmed and to the people that eked out a living on the same sandy soil – in a way that I am not. It was never all that wealthy a place, but it was also not a place with great discrepancies in wealth. De Toqueville’s America was alive and well in my grandmother’s life. Social capital she had.
Like anyone who lives as long as she did, my grandmother witnessed tremendous change. Technological change obviously. Other changes as well. She was born into a community that was in some ways more prosperous then than it is now. Not in a narrow material sense – a man and a tractor can produce more grain and more cash now than then. But the productivity of the tractor – along with the efficiency of Wal-mart retailing – also drained some of the vitality out of small prairie towns.
Central Kansas had far more people at the turn of this century than it does now. The original Stafford high school, my grandmother’s high school, still stands. It is a more imposing structure than most of today's buildings.
My grandmother had the frugality – and dislike of debt — that comes from starting a family in central Kansas during the depression. She didn’t believe in spending money on things you didn't need, or buying anything that you could make – and she was the kind of person who could turn a chicken, a few vegetables from her garden, some flour and a bit of water into a truly delicious meal.
But she also had the kind of generosity that comes from the knowledge that you can survive on very little. Every year she and my grandfather gave me – and their other grandchildren – the gross proceeds from the sale of a calf. They had five grandchildren and only about thirty cows, so they were giving up a substantial fraction of their gross proceeds, and an even bigger share of the net.
My family wasn’t clued in to the Ivy league’s financial aid system – and didn’t realize that assets held in my name had to be exhausted before any application for financial aid would be considered. I always thought it was a little unjust that my grandparents' sacrifice ended up saving an institution as wealthy as Harvard a bit of money. But I also am proud that I know the real cost of one year’s tuition, room and board at a top-tier private university in 1989-90 was 18 calves and accumulated interest. I am pretty sure that my first year of college was the only brand-name luxury good my grandparents ever bought.
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Posted in General | 0 Comments »
Posted on Thursday, July 12th, 2007
By bsetser
I am a bit pressed for time today, so I won’t be able to do a full analysis of today’s trade data.
US imports were higher in May than in April. Non-oil imports rose by $2.5b; petroleum imports rose by $1.5b. But y/y growth in non-oil imports is still pretty subdued – 5.6% in May. I wouldn’t say non-oil imports are flat right now, but they aren’t growing that fast either.
Oil, well, is likely to continue to be a drag. The May import price was around $59.4 a barrel. That could easily go up.
Export growth picked up though – the q1 export slump doesn’t look to have been sustained in q2. May export growth was a bit over 11% y/y, and the y/y change in the three month moving average was only a bit less. And later in the year, Boeing may even start exporting a few 787s along with its 777s and 737s.
The strong global economy is having an impact. As is the weak dollar. Too bad the yen and the RMB are even weaker – the yen because it has fallen in nominal terms, and the RMB because its rise against the dollar hasn’t been fast enough to offset China’s strong productivity growth.
If oil does not rise much further, if non-oil goods imports continue to grow at 5-6% y/y and if exports continue to rise by 10-12%, the US trade deficit should fall slowly over time. (BWS Note: edited — I initially left a "not" out)
US imports from China rose by 13.5% in May, and for the year-to-date, they are up 16.8%. US imports from the rest of Asia are flat, so total imports from Asia are up 8.1% ytd. That is more than the 5.4% increase in non-oil imports ytd. Asia’s overall surplus is still rising relative to US GDP – and Asian producers are gaining market share relative to other suppliers.
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Posted in U.S. trade deficit and external debt | 14 Comments »
Posted on Tuesday, July 10th, 2007
By bsetser
As Felix notes, I am reserve-obsessed. For good reason, I would argue. Right now, central bank reserve accumulation is driving the global flow of capital. Private markets have been out-gunned.
We now know that the BRIe economies — Brazil, Russia and India — added $200b to their reserves in the first half of the year. Close to $199b to be exact. Russia accounted for $102b of the increase, Brazil chipped in $61.5 and India added another $36b. A tiny bit of that was valuation gains; most of it was real. $200b — $400b annualized — is a phenomenal sum.
We don't yet know how many reserves the BRICs added in the first half of the year because we don't yet know how much China added to its already very large stock of reserves. We do know it added $135b in q1 — and reportedly another $45b in April, but that hasn't been confirmed. Jon Anderson of UBS thinks Chinese reserves growth slowed in May and June, but, well, it is hard to know for sure.
And if reserve growth slowed, that raises as many questions as it answers — we now know that China's June trade surplus was close to $27b — very large indeed.
Some of the June surplus may be borrowed from July, as certain exporters wanted to get their last tax rebates — but I wouldn't bet too strongly on that. Chinese export growth was been running at 25-30% y/y since late last year. The June pace of export growth (27% y/y) isn't totally out of line. As Macro-man (great post!) notes, the real reason for the surge in China's surplus was a fall in the pace of import growth. Do look at his graphs showing the decomposition of China's trade.
Combine a $27b trade surplus, $5b or so in FDI inflows and $5b a month in interest on China's existing reserves and it is hard to see why China didn't add at least $37b a month to its reserves — that is, unless the PBoC resumed farming some of its reserves out to the state banks through various swap contracts.
China's 2007 trade surplus will be exceptionally large too. Its 2006 surplus was around $180b (customs basis). Its surplus in the first half of 07 was over 80% larger than its surplus in the first half of 2006. It exported about $1 trillion of goods in 2006, and should easily add $250b to that total. Imports haven't come close to keeping up. The math is pretty clear.
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Posted in central bank reserves | 34 Comments »
Posted on Sunday, July 8th, 2007
By bsetser
The funny thing about the dollar is that it is now kind of weak — except against the currencies of those places that actually have large current account surpluses.
The dollar is close to record lows against many European currencies, and at multi-year lows against the Canadian dollar and the Australian dollar.
But the yen is even weaker, and China and the Gulf still track the dollar. Between them, Japan, China and the GCC countries (or the oil exporters writ large, as North Africa and Russia peg to either the dollar or a euro/ dollar basket) account for a very large share of the world's current account surplus.
China did let the RMB rise by 1.5% against in q2 – but that is not anywhere near enough to make up for its large accumulated undervaluation, ongoing Chinese productivity gains and the dollar's slide v lot of other currencies. China has depreciated over the course of this year against its the currencies of its largest trading partner (the EU). No wonder China’s current account surplus is big and still growing.
A lot of press reports confuse appreciating against the dollar with a broad-based real appreciation. They aren't the same thing. Not when the dollar is sinking.
The Saudis didn’t even let the riyal rise. It fell along with the dollar. That certainly isn’t helping to offset the inflationary pressures associated with the Gulf’s growing desire to spend — especially in conjunction with a set of policy decisions that will increase the share of the windfall that is invested at home and reduce the share of the windfall that is invested abroad.
Oil at $70 plus and a 1.35-1.36 dollars/euro have attracted a lot less attention the second time around, but the combination is a sure recipe for both a large Gulf surplus – and a lot of gulf inflation. The Gulf’s surplus is falling (imports are no doubt way up, though perhaps not up 40% y/y like Russia’s), but it is still big.
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Posted in Exchange Rate | 48 Comments »
Posted on Saturday, July 7th, 2007
By bsetser
Thanks to Henny Sender of the Wall Street Journal. One reason why the Abu Dhabi Investment Authority (ADIA) has gotten so big so fast is that it had (and still has) a lot of money invested in emerging market equities.
“Analysts believe it [ADIA] may well be the largest investor in emerging economy stocks”
And those securities – unlike China’s huge holdings of US Treasuries and Agencies – have gone up in value. A lot. Turning an oil surplus into Brazilian and Turkish equities has been a better business model over the past say five years than turning a “manufacturing workshop to the world” surplus into US bonds.
And then ADIA levered its oil surplus up. Not directly. But by investing in various private equity funds. Think of it this way: ADIA gives a private fund some money to manage – and that fund borrowed some of the dollars that the Indians and the North African's have placed in the international banking system, as well as taking advantage of the liquidity generated by huge Saudi Monetary Agency and PBoC purchases of debt securities to gear themselves up. Sometimes ADIA invested along side various private equity firms in specific deals as well.
“It [ADIA] has a long history of investing in private equity firms and investing along side them in some of their largest purchases.”
More after the break.
I would bet that the Saudi royal family – and other key families in the Gulf – have played a similar game. Carlyle certainly manages the money of someone in the Gulf. Sender:
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Posted in emerging economies | 10 Comments »
Posted on Friday, July 6th, 2007
By bsetser
They don't need the money.
Deborah Solomon's interesting A1 Wall Street Journal story about the US Treasury's concerns that the world may not be quite as open to US direct investment as it used to be didn't mention that fact. It focused instead on the "perception that the US — the world's largest recipient of foreign direct investment — is erecting new barriers to foreign capital."
But the fact that both China and Russia save more than they invest and are net lenders — not net borrowers — from the rest of the world seems rather relevant. Both are, I suspect, growing tired of taking funds that foreign investors bring in looking for big — 10, 15, or more — returns and sending them back to the US where they get 5% in the Treasury and Agency market.
That kind of swap may generate dark matter for the US, but it isn't obviously in the interest of the world's emerging economies.
Of course, the fact that they cannot swap equity for equity, and use the funds brought in by private investors to the US to add to their state investment company's holdings of US equities may play a role as well …
One thing I consistently notice in these kinds of stories. US officials — and even more so US businessmen — still tend to talk as if the US is an investor in the world, not the world's biggest borrower.
On a stock basis, that is still (sort of) true. Total US external liabilities exceed total US external assets, but thanks to the strong performance of non-US markets over the past few years, US equity investments abroad are worth more than foreign equity investment in the US.
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Posted in emerging economies | 16 Comments »
