Maybe the US data is capturing something – Chinese and Korean reserve diversification
The head of the People’s Bank of China says that China is seeking to diversify its reserves.
“China is seeking to diversify its foreign exchange reserves,” Zhou said yesterday, without elaborating.
Of course, Zhou also said that the market now plays the dominant role in the determination of China’s exchange rate, a view which is hard — in my view — to square with record central bank purchases of foreign exchange.
Diversification could mean one of three things:
– Adding new currencies to China’s reserve mix
– Diversifying the kind of dollar assets China holds
– Reducing the share of China’s reserves held in dollars
One and two are possible without changing the dollar share of China’s reserves. Deciding to hold say a few New Zealand dollars need not imply a reduction in the overall share of China’s reserves held in dollars. Shifting from Agencies to corporate equities need not reduce the dollar share of China’s reserves.
There is at least some evidence that China reduced the dollar share of its reserves – though there are enough holes in the US data that it is hard to know if the growing gap between China’s reported dollar holdings and its total foreign assets reflects a fall in the dollar share of China’s reserves or a growing gap between China’s total US dollar and what appears in the US data. But if China has reduced the dollar’s share of its reserves over the past two years, Europe really has cause to be annoyed. Growing Chinese demand for euros could have contributed to the euro’s rise and the RMB’s ongoing depreciation v the euro – a depreciation that does much to explain continued strong Chinese export growth.
Korea recently disclosed that it has diversified its reserves – reducing the dollar’s share of its reserves to 65% and broadening the type of assets that it holds. The Bank of Korea reports that:
Its investment portfolio last year included government and corporate bonds, asset-backed securities and common stocks. Investments in common stocks are managed by the Korea Investment Corp., the country’s manager of sovereign wealth funds.
Investments in treasuries, bonds issued by state-run entities and corporate bonds took a lion’s share of its investment management ― treasuries accounted for 35.5 percent, bonds by state-owned companies 28.8 percent, and corporate bonds 15.4 percent.
Investments in asset-backed securities accounted for 11.6 percent, followed by stocks for 1.3 percent.
But the central bank noted that it has been increasing its securities investments. Investing in bonds is considered safer than stocks, but investing in stocks gives higher returns in the long-term, analysts say.
“We have been diversifying our investment portfolio to offset risks concerning foreign exchange by seeking products that give higher yields with the country’s foreign reserve holdings,” said the central bank.
This confirms something that has long been apparent in the TIC data – namely that Korea was shifting out of Treasuries into riskier assets.
If Korea can offer this kind of detailed disclosure, I don’t see why others cannot follow suit. By investment in state owed companies, I presume Korea is referring to government sponsored enterprises like the US agencies. That would be consistent with the US data on its holdings.
The US data suggests that China has about equal amounts in Treasuries and Agencies. The US data though does not suggest that China has followed Korea’s lead and placed 25% of its dollar portfolio in corporate bonds and asset backed securities. Korea seems to have been more aggressive than China in diversifying both the currency composition and asset mix in its reserves, with mixed results. Buying riskier US assets probably hasn’t paid off; shifting away from dollars did.
Korea though has also reduced its intervention in the foreign exchange market and allowed its currency to move more than most in Asia — something that likely made it a bit easier to adjust the currency composition of its reserves.
For what it is worth, I am now lowering my baseline estimate for the dollar share of China’s reserves from around 70% to a 65% to 70% range. The recent survey data just didn’t push Chinese holdings up enough for me to be confident that around 70% of China’s reserves are still in dollars. But barring better data/ a bit more disclosure on China’s part, I don’t have total confidence in adjustment my estimate downward either.
Maybe China and Korea are in desperate need to assist their best client. However to sustain the U.S. dollar and the assets contained within is a hopeless cause unless rates rise dramatically.
The recession has the U.S. trading partners scrambling to live with a currency that is a disaster.
The U.S. is now focusing on exports with a service sector economy.
"One and two are possible without changing the dollar share of China’s reserves. Deciding to hold say a few New Zealand dollars need not imply a reduction in the overall share of China’s reserves held in dollars."
Eh? This is only trivially true, as in if they add to small a percentage to their reserves or NZD then it won’t change the percent in dollars. But it’s not logically true, is it?
"Korea though has also reduced its intervention in the foreign exchange market and allowed its currency to move more than most in Asia…"
Quite true but as reported in Lex today the Won has depreciated 4.6% ytd against the US$. I understand that specific circumstances vary from country to country but aren’t Asian currencies supposed to be appreciating the US$ if allowed to float more freely?
Agog — Korea floated up in 05 and 06, when it dramatically scaled back its intervention. Once you find an equilibrium level with limited intervention, the currency should resume moving up and down.
Matt — if your reserves are growing as fast as China’s are, it is quite possible to add a new currency to the mix and put $1-2b of the flow into the new currency without scaling back the dollar’s share. Of course, that would imply scaling back another currency’s share. I noted the possibility because many countries do limit the number of currencies that they invest in, and adding a new currency can prompt talk of diversification even if the actual flow is small. Your broader point tho is right — directionally, you presumably add more currencies if you are looking to reduce the share of your portfolio held in the existing set of currencies, including the currency that makes up the largest share of your existing reserves.
Energy giant British BP says China has bought 1.0-percent stake for $1.96 billion
http://afp.google.com/article/ALeqM5ip4B8SRWMnW5jyh2_90n4h2Tg5Ow
The Daily Telegraph reported earlier Tuesday that a Chinese state-linked investment fund had built up a BP stake worth almost 1.0 billion pounds (1.24 billion euros, 1.96 billion dollars). The paper, which did not cite its source, also reported that the same Chinese fund was behind the purchase of a 1.0-percent stake in French oil and gas group Total earlier this month.
Dr. Setser–I don’t want to make it another global north v. global south issue, but…
If Korea can offer this kind of detailed disclosure, I don’t see why others cannot follow suit.
The real question to me is, "Why should large reserve accumulators be obligated to disclose more?" This is an almost tired analogy, but why should LDCs be required to disclose more when hedge funds in the US are not even being asked by the US Treasury to disclose more through regulation?
Speaking of South Korea and hedge funds, it’s the same deal with the policy response from the IMF in the wake of the housing bubble - excess foreign borrowing is bad when done by Korean firms, but it’s OK when the US floods the system with more liquidity:
The Committee welcomes the actions taken by the central banks of the advanced economies to provide liquidity support to ease strains in interbank markets, and calls for continued vigilance to deal with the financial turmoil.
I think Sammy the beggar should just shut up and be glad that it can still con so many into this rip-off game, although they appear to be wising up a bit.
PS: The comments section is messed up. The radical line spacing is weird as probably no one is using quadruple spacing, and the link tags appear to be disabled. Please ask the RGE tech guys to have a look.
A major geo-political concern of the Anglo-American elite is the lowering of economic growth rates in China. This "soft power" Neo-liberal faction smears the Chinese with political disinformation on CNN, and the New York Times. It isn’t going to work Hillary Clinton and Robert Rubin. Through China’s effective diplomacy, many developing countries are on the brink of slipping out from under the US or British control into Chinese or more independent status. LOL
http://www.bloomberg.com/apps/news?pid=20601080&sid=amNSWi_QJPsc&refer=asia
China’s GDP May Grow 10.4% in First Quarter
Gross domestic product rose 10.4 percent in the first quarter from a year earlier, according to the median estimate of 24 economists surveyed by Bloomberg News, after expanding 11.2 percent in the previous three months. The statistics bureau is due to release the figure at 2:30 p.m. tomorrow.
A further problem for US dollar hegemony: The middle east which is seeing double digit inflation has resurrected the idea of a common Middle East currency, which should be at free float by 2010.
http://www.handelsblatt.com/News/Boerse/Rohstoffe-Devisen/_pv/_p/203855/_t/ft/_b/1417475/default.aspx/eine-region%2c-eine-waehrung.html
Jim Rogers: China’s Economic Advance is All But Unstoppable http://www.moneymorning.com/2008/04/15/jim-rogers-chinas-economic-advance-is-all-but-unstoppable/
Rogers: I moved to Asia because my daughters are going to grow up in the 21st Century, and I think they’re better off in Asia than in the U.S. They’re certainly better off at least knowing about Asia … knowing Mandarin. No matter what happens to them, they certainly could spend their whole lives in the U.S., but I want them to have the exposure to - and the knowledge of - what’s happening in Asia because, in my view, Asia’s certainly the future.
And I think that anybody born in 2003 or 2008 needs to understand Asia. They need to understand America, too, but I cannot give my wife Paige and our children that knowledge [of Asia while] living in New York, or anywhere in America. I can only give them that that knowledge and skill living in Asia. So here we are!
Meanwhile Bernanke says "Nothing fundamentally broken on Wall Street", while ex-Fed chair Paul Volcker is essentially saying the BernankeFed Is Incompetent And Dangerous.
Emmanuel, yes the line spacing is messed up — i’ll see what can be done.
as for your point, I would note that many emerging market central banks and SWFs don’t seem to want hedge funds to disclose the amount of sovereign money that they manage, or seem to want to push the hedge funds that they have invested in to disclose more about their portfolios. EMs are now in a position where they could use their financial leverage to change the regulatory regime if they so wanted. the CIC supposedly has put some money into a set of hedge funds.
more generally, i think the core question — setting aside the point that those managing public money should be able to explain how they are managing the public’s money to their own citizens — is whether the right regulatory regime for sovereign investment is the same as the right regulatory regime for private investment, or whether sovereigns are special. I would note that public money in the US usually is managed very transparently (see truman’s paper). And I think the only viable system for managing a massive increase in sov. investment in the us equities is one that brings that money into harmony with existing us domestic practice, even if that means EM sovereigns have to change. Yes, that means the US is pushing people around a bit, but the US never wanted this much sovereign asset growth …