Disappearing into London … The latest TIC data
I got my hopes up after the January TIC data. For the first time in a long time, the TIC data matched what I though I knew about the global flow of funds. Central bank reserve growth was very strong in January. Recorded official inflows were strong. The data matched.
It couldn’t last.
For every January, there is a February. If you believe the US TIC data, the world’s central banks stopped buying US assets. Just stopped. Official purchases (net) went from positive $78.3b in January to negative $9 billion in February. That is kind of like how foreign investors stopped buying “private” US mortgage backed securities and CDOs last summer.
A $90 billion swing in monthly capital flows is huge. It is hard to square with the notion that central banks are a stabilizing force in the market.
Of course, it is also hard to square with a lot of other data. If you believe that central banks were net sellers of US assets in February, well, you probably shouldn’t be reading this blog.
Official flows likely did fall off a bit in February — at least relative to their torrid January pace. Global reserve growth seems to have slowed a bit. But global reserve growth — and I suspect official purchases of US assets — didn’t fall by anything like the TIC data indicates.
The TIC data for example shows that official investors reduced their Treasury holdings by $6.4b (short and long term) and their agency holdings by $4.4b. However, the Treasuries the New York Fed held in custody for other central banks rose by $13.34b between January 30 and February 27. The Agencies held by the New York Rose by $15.49b. Net sales of $10.8b or net purchases of $28.8b. Take your pick.
Anyone trying to write a “central banks and China stopped buying Treasuries story” also might want to look at the rise in central bank holdings at the New York fed between February 27 and April 3 ($67.27b) and the rise in central bank Treasury holdings over the same period ($29.49b). Central banks bought a lot of US debt in March.
The TIC data shows that China didn’t increase its US holdings at all in February. Net long-term purchases of $10.73b were offset by net short-term sales of $10.64b. Total Treasury holdings fell by $5.7b, and Agency holdings only rose by $1 billion.
That makes no sense. China’s reserves rose by something like $47b in February after adjusting for valuation gains. Keeping the dollar share of China’s reserves at around 70% would have required China to buy about $40b of dollar-denominated debt. Even if you think China is diversifying at the margin, it bought some dollar-denominated assets and some US debt. (more detail follows)
The Chinese flow that doesn’t show up in the US data may be going through the UK ($23.2b of Treasury purchases and $$19.4b of Agency purchase), or perhaps through Hong Kong (total purchase of $16.9b – mostly from a rise in short-term holdings and equity purchases).
The same broad story holds for Russia. It reduced its recorded short-term holdings by $10.1b (mostly by reducing its short-term agency holdings by $9.6b). Its $4.65b in long-term purchases didn’t offset the fall in its short-term claims.
Of course, it likely bought more long-term bonds than show up in the US data, as – like China – it often buys through London.
The rise in the Gulf’s claims – up around $5b, counting the $3.3b rise in its short-term claims – is rather small for a region pulling in $25-30b a month more than it needs to cover its import bill from $100 oil. $5b would be small even in relation to the $12b rise in the foreign assets of the Saudi Monetary Agency.
Only Brazil, which bought $9.4b of US assets, makes sense given all else that we know.
Korea’s $2 billion purchase of equities (KIC/ Merrill) showed up cleanly in the US data. Kuwait’s purchase of Merrill didn’t show up in the data for the Asian oil exporters. Go figure. Singapore incidentally offset the $3.6b it spent on US equities (including bank stocks) by cutting its Treasury holdings by $5 billion. Its net US holdings – as measured in the US data – fell by between $0.8 and 0.9 billion.
(all the detailed data I used can be found here, though it helps to know where to look)
I think the basic story in the data is simple: a host of big players (Norway as well as China and Russia) cut their short-term holdings – which had increased dramatically over the past few months – and reallocated their funds into somewhat longer-term securities. The fall in their short-term holdings registered in the US data. However, the US data didn’t pick up all of their long-term purchases.
Global reserve growth was weaker in February than in January, but it was still quite strong.
Finally, remember that the rise in the UK’s holdings of Treasuries and Agencies is deceptive. Every survey has revised the UK’s holdings of Treasuries down. The last one was no exception.
The TIC’s division between official and private simply isn’t to be trusted.
It always understates official purchases.
It also consistently understates Chinese purchases.
Great work.
Brad/anyone else - Why would Chinese et al. move to longer term US debt securities? Yield?
yield. a sense that us rates will remain low for some time so there isn’t much opportunity cost to looking in a rate for a longer period of time (SAFE is more of a buy and hold type investor from what i have heard than a trader — tho it may have some trading accounts). and perhaps a bit of laziness. rolling over a growing stock of short-term debt even as you have to place a ton of new debt is a bit harder than having more debt with a longer maturity. I am not sure this is a factor, but I have gotten a sense that SAFE is stretched by the sheer logistical difficulties associated with finding a home for all of its cash. both Russia and China had a lot more short-term debt than "normal" by the end of January. all this tho is pure speculation. I was a bit surprised as my general sense is that central bank cash is piling up in the front end of the curve.
Brad
Assuming you’re referring to the routing of money through London by "Chinese" investors to buy US assets, the question as always is why? Unless it’s done with intentions of en masse selling of said assets without the government taking bad press for it. That does not bode well for stability and may indicate a speculative element, as unlikely as it seems? Hopefully, I’m wrong
In the Japanese bop date [portfolio details] have you noticed the large amounts moving into Japanese money market paper and bonds from London? It’s been going on for many months. Could this be part of the Chinese diversification?
Judy — I don’t think there is anything nefarious. China doesn’t hide its ownership. The reallocation from the UK to China in the survey indicates that US custodians are holding the bonds for China. I think it mostly is a matter of convenience. The UK is open during the hours when SAFE wants to buy US bonds.
Just speculating. Perhaps the US Central Intelligence Agency documented involvement in fomenting the Tibet Independence Riots destroying property and burning a large section of Lhasa has sometime to do with the reluctance of the China PBoC to increase US Treasury bond reserves. Prior to the Beijing Olympics, the violent riots in Tibet’s capital in mid-March were a carefully staged event by US Intelligence Agencies in conjunction with US mainsteam newsmedia smear of the Chinese.
http://www.globalresearch.ca/index.php?context=va&aid=8673
The Washington Consensus is absolutely paranoid over the economic rise of China and the strategic geopolitical implications. There are deep-seated geopolitical objectives behind the US campaign against the Chinese government. In any case, the Japanese Central Bank isn’t lifting a finger either after concluding that the massive US Economic imbalances are beyond the capacity of Japan’s economy to bailout. And China’s economic rise to shortly become the world’s largest economy is all but unstoppable now.
http://www.moneymorning.com/2008/04/15/jim-rogers-chinas-economic-advance-is-all-but-unstoppable/
Official China Daily Editorial on US Intelligence Agency involvement with Tibet Riots murdering Chinese
http://www.chinadaily.com.cn/china/2008-04/16/content_6622346.htm
The long list of countries China is suddenly trying to move closer to seems scary to me, especially since their finance head is saying China intends to diversify away from the US. China just completed their first-ever economic and financial dialogue with the UK on Tuesday (link: http://www.chinadaily.com.cn/china/2008-04/16/content_6620017.htm). This follows a series of co-ops that have yet to really be broadcast of the MSM from what I’ve seen. On the 14th, the Vice Premier of China called for closer ties with Chile (link: http://news.xinhuanet.com/english/2008-04/14/content_7976622.htm). They did the same with Pakistan on Tuesday (link: http://www.chinadaily.com.cn/bizchina/2008-04/16/content_6620668.htm). China and Australia are deep in discussions over a free trade agreement (link: http://news.xinhuanet.com/english/2008-04/10/content_7954985.htm). They’re doing the same with Finland on April 16th. And Sweden on April 14th. And Kazakhstan on April 12th (link: http://news.xinhuanet.com/english/2008-04/12/content_7966399.htm). And New Zealand on April 10th (link: http://www.chinadaily.com.cn/bizchina/2008-04/10/content_6607511.htm). As we’ve seen, Vietnam also has closer ties with China (link: http://vietnamnews.vnagency.com.vn/showarticle.php?num=03BUS120408). Peru is on 2nd round talks regarding an FTA, as of February 2008 (link: http://www.chinadaily.com.cn/bizchina/2008-02/29/content_6496945.htm).
Could China be taking these steps strategically to enable it to more firmly move away from business with the US, as it pulls out of US treasuries? Wouldn’t it make more sense to do things this way, than to keep trying to pile business into a country it would be marring economically?
Brad–
Do you have an estimate for how much of China’s FX reserves the Fed holds for them custodially?
Thx
Jeff H — I don’t. Until recently I wasn’t even sure China made use of the Fed’s custodial accounts. The scale of the recent increase in custodial holdings tho is hard to explain without some Chinese holdings there. A complete non-answer would be that China’s share would be somewhat lower than Japan’s share and somewhat higher than Libya or Venezuela’s share …
Brad, nice to hear from one so sceptical of SWFs that there aint no nefarious foreign plot, hehheh, just kidding!
if there were a plot the pboc’s holdings presumably wouldn’t show up in the survey … i do think tho that there may be a "plot" to avoid disclosing the true scale of china’s foreign asset growth in q1/ the true pressure on the rmb.