Don’t look to the TIC data to understand how the US financed its current account deficit in q1
It is appropriate, I suspect, for my first post over here – and I want to reiterate my thanks to Nouriel for hosting my blog at RGE for the past 8 months even I after I moved to the Council – is on the latest Treasury capital flows data. The TIC data is both amazing – no other country puts out a comparable data series – and intensely frustrating.
The March data highlights why trying to read the TIC data can a challenge.
The data on long-term flows matches what we more or less know about the world. It shows a lot of official demand for US long-term debt — with total central bank and sovereign fund purchases of a bit less than $50 billion (mostly Treasuries). It also shows the ongoing absence of demand for US long-term “corporate” debt from either private or official buyers. Foreign investors sold more US corporate debt than they bought in March. That is a change from the pre-August 2007 world. Monthly purchases of $40-50 billion were the norm for a while.
The frustration comes from the data on short-term claims. A $34.1 billion fall in official short-term claims larger offset the $48.1 billion in net official (central bank and sovereign fund) purchases of long-term bonds. The resulting $14.0 billion total was further adjusted (by around $4.7 billiion) for principal repayment on asset-backed securities, producing $9 billion in net official inflows.
That isn’t much for a world where Saudi reserves are growing by $15 billion a month and Chinese foreign assets are growing by $50 billion a month. The total growth of central bank and sovereign fund assets now exceeds $100 billion in an average month.
Net private inflows were negative $48.2 billion in March – and only $35.3 billion for all of q1 — largely because of a huge fall in short-term bank claims.
The US needs a net inflow of around $175 billion to cover its external deficit, so that leaves a rather substantial gap. I doubt all of it was filled by FDI inflows.
For the first quarter as a whole, official creditors provided $76.5 billion in net financing: A $20.6 billion fall in short-term claims offset $107.6 billion in long-term purchases (and 10.5 billion of principal repayment on asset-backed securities). But private creditors took $41.2 billion out of the US.
There is good reason to think, however, that the TIC data significantly understates official purchases of US assets in the first quarter.
Two clues.
First, private investors in the UK bought $98.5 billion of Treasuries and Agencies. That is suspiciously large. Almost all of the buildup of Treasuries in the UK has – over the past few years – proved to be a mirage. When the survey data comes along, the UK’s holdings get revised down – and the holdings of China, Russia and the Gulf get revised up.
Second, the TIC data and the New York Fed’s custodial data don’t match up.
The Fed’s custodial holdings of Treasuries and Agencies rose by $151 billion in the first quarter ($72.5b in Treasuries, $78.3b in Agencies). The TIC data for the first quarter shows $80.1b in central bank purchases of Treasuries and Agencies, ($59.1b of Treasuries, $21.0b of Agencies). To make the data match up, I added short-term flows to the Treasury and Agency totals. The same holds for March – the $69.8b rise in the Fed’s custodial holdings outpaced the $33.2 billion increase reported in the TIC data.
What is going on?
I suspect central banks decided to put some of the money that they had parked at the front end of the curve – in bills and deposits – to work. The US data captured the fall in their short-term holdings, but not the entire rise in the long-term holdings. Russia and others buy a lot of long-term debt through London. Some of the securities bought in London are then turned over to the Fed for safekeeping.
I also suspect that the unwinding of the “shadow” banking system continues to have a big impact on the data, though in ways that I don’t necessarily fully understand. A lot of the rise in overall cross-border flows over the past few years came from a rise in short-term flows. That changed in August. The scale of capital moving across borders – both inflows and outflows – fell. Something similar seems to have happened in q1. Foreign claims on US banks fell by $200 billion …
It is easier to make sense of the various national data points. Or most of them.
London is buying Treasuries and Agencies but not corporate bonds or equities. But here it is almost certain that the UK is just acting as an intermediary. A European bank buys a Treasury bond that it then sells to the PBoC.
Chinese flows remain smaller than would be expected given the scale of its reserve growth. Reserves were up $120 billion in q1, after adjusting for valuation. Only $30.6 billion of that shows up in the US TIC data, as a $7.4 billion fall in short-term holdings offset $38 billion in long-term purchases. If you think that reported reserve growth understates Chinese foreign asset growth –the state banks had to hold dollars to meet their reserves requirement, some fx was shifted to the CIC – the gap is even bigger.
This fits together with the story about London. I also suspect that some of the (now large) net purchase of US assets from Hong Kong also reflects the activities of China’s State Administration of Foreign Exchange
Russia fits the same pattern, but in a more extreme way. In q1, a $21.2b fall in Russian short-term holdings offset a $14.7 billion rise in its long-term holdings. London again. For some reason, the US TIC data captures Russia’s short-term holdings better than its long-term holdings.
The Asian oil exporters added $12.1 billion to their short-term holdings and $7 billion to their long-term holdings (with almost the entire $7 billion coming from a couple of large equity investments in January … ). Saudi Arabia alone added $40 billion to its foreign assets in q1 – and it is reasonably to think the other Gulf states added a similar amount. So the $19.1 billion increase is actually rather small given the huge sums available for the Gulf to invest abroad.
Norway is also interesting, though in a different way. It bought $20.9 billion of long-term assets (mostly treasuries) and reduced its short-term holdings by $16.9 billion. It had a big impact in March – buying $11.3b of long-term Treasuries while reducing short-term claims by $10.1b. Clearly Norges bank is making some kind of complicated bet on US interest rates – or hedging some other position with large treasury purchases. It often produces large swings in the official flows data.
No more from me. Arpana Pandey of the Council on Foreign Relations and I are working on a series of charts that seek to illustrate the changes in various countries’ holdings graphically. I suspect that our charts will tell they key stories better than more words.
First on the first post?
Welcome to your new home, Brad! I think you’ll have a large crowd follow you here.
It seems that official holdings actually did act as a reasonable counterpoint to private demand during March, within their own risk parameters. That surprises me. They soaked up a lot of duration and set loose some highly needed short-term treasuries. Not a profitable trade so far, but maybe they have a special empathy for systemic risk and the pressures authorities face trying to manage it.
Wishing you continued success! I look forward to seeing some beautiful heatmaps from you on global capital flows. As you say, they will be very influential in conveying graphically the way the money flows. Bookmarked and subscribed.
Brad: “Net private inflows were negative $48.2 billion in March – and only $35.3 billion for all of q1 — largely because of a huge fall in short-term bank claims.”
Does that mean that private investors are starting to move away from the dollar? Or it is just a partial number? Is it a first or does it look like a trend?
Your point about the european bank selling to PBOC is very valid. In the past when you saw large corporate bonds related in flows, they were actually flows related to US primary dealers (domestic or foreign) buying the securities in their London books to hedge theCredit default swaps they sold to european investors. You saw a huge increase in corporate bond inventories of primary dealers.
NDK — they also may have just tired of rolling over a ton of short-term bills and opted for a bit longer maturities. Many don’t mark to market, so haven’t necessarily taken a capital loss — tho they could have locked in a higher interest rate by waiting. I suspect their motivation for going out the curve was quite simple: they wanted to get a bit more income than they could get on bills.
More generally though there official sector’s visible portfolio remains very concentrated in safe assets (as long as the agencies have a de facto gov. guarantee). Once you net out the $30b that went to the banks, official equity flows — visible flows — remain non-existent. I suspect that more is happening, just in ways that don’t show up in the TIC. SAFE supposedly is buying some US equities (something the last survey hinted at as well)
Brad, nice to see your new blogsite.
At the risk of sounding really stupid (story of my life), when you said “Some of the securities bought in London are then turned over to the Fed for safekeeping.” – why?
As for the switch from long term to short term, well, no one really wants to commit their funds to anything that may not even see the long term – but that’s just a guess. Hope to see those maps soon, simplicity is a virtue so underrated these days, methinks a vodka martini calls…
MarketWatch has an article this morning that claims that “U.S. officials pushed other nations for greenback support.” This whole thing makes me wonder whether the US pressure on China regarding the Yuan is disingenuous.
It doesn’t seem like the US really wants the dollar to get any cheaper. And so welcomes Chinese (and other countries) intervention to support the value of the dollar.
Judy — The fed doesn’t charge a fee (I think) for bonds it holds as a custodian; it treats this a service for fellow central banks.
Full carry. If so, that might explain all the talk about the GCC and China reducing their $ sales. That is a rather concrete form of greenback support (v the euro). The FT reports that the US attitude on the $ did change, so maybe there is something to this. Who knows. I suspect the US does want the RMB to appreciate/ $ to depreciate but may no longer want the $ to depreciate v the euro. the US position on the gulf is that they should peg — even it means inflation. I think that is misguided, but it now seems to be policy.
Congrats on the new virtual digs, Brad, and keep up the good work.
Two things about the China reserve data:
I think that some of the reserves are actually being held in Hong Kong. The amount of custodial liabilities in HK has increased quite a bit.
Also, a lot of the PRC reserve growth may be from “informal money” that is now seeing the light of day as it is being converted to RMB.
Given that trade in the instruments of “financial innovation” is slowing down, those Londoners must be thankful that “private” appetite for official US securities is still there.
Nice new location, BTW. I was wondering why NRoubini was trumpeting boatloads of new blogs on the good ol’ RGE site. The reason is clear now as the RGE Monitor has lost its franchise player to free agency!
It used to be simpler in the olden days when I only had to visit two blogs (Roubini/Setser), but I guess things change.
2fish — i would be interested in the data showing HK’s custodial liabilities. I also suspect that a rising share of China’s reserves are held in HK.
Nice new blog!
There’s no way to track equity purchases, right?
Brad,
Would it be fair to say then that the FED acts as a consumer bank for central banks? /clearing house of sorts?
“rising share of China’s reserves are held in HK.”
are they preparing for any eventu
oops, got cut off, mistake, apologies…
eventualities; eg when they need to deploy reserves in a hurry?Or opportunities when they wish to invest without all the additional redtape on the mainland?
Laurent — Equities are tracked in the TIC data. I didn’t find an interesting story there this month. Official purchases of equities (recorded ones) fell back after the splurge of dec and january and february, but that splurge was tied to the bank recapitalizations.
Judy — I am not sure why China might be holding more reserves in HK. I just am noting that it seems to be doing so. SAFE has a HK office that was actively buying australian banks for example. Redtape isn’t the answer, since SAFE Beijing isn’t subject to any restraints that SAFE HK also isn’t subject to.
I think redtape is the answer. SAFE may have an office in Hong Kong but because of one country, two systems it does not have any governmental authority in HK. A HK subsidiary of a PRC bank is subject to CIC and CBRC oversight through it’s parent company and it is also subject to regulation by the HK banking authorities. However the dollar deposits of a HK subsidiary of a PRC bank are *not* subject to SAFE authority since they are outside of the currency firewall.
This may be significant since SAFE is legendary for being very obstinate about permitting currency transactions. Being able to allow or disallow currency transactions gives SAFE a huge amount of power, and they want people to know that they have it.
I have this sense that the Blackstone debacle really hurt CIC, since it seems that every PRC governmental entity with spare cash seems to be talking about forming its own SWF, which wasn’t the case last year.
Fullcarry: It doesn’t seem like the US really wants the dollar to get any cheaper.
One has to think very carefully about what it means when you say that a nation or a government “wants” something. In the case of a totalitarian state, this is easy. The Soviet government in 1941 wanted whatever Joe Stalin wanted, and the North Korean government today wants whatever Kim Jong-Il wants.
However neither China nor the United States are totalitarian states, and as a result the governments are made of lots of individuals all of whom want different things, and there is a lot of coalition building to form interest groups which also want different things. China isn’t a liberal democracy, but it isn’t a totalitarian state either, and when it comes to economic policy, the fact that China isn’t a liberal democracy becomes rather irrelevant to creating economic policy.
Economic policy in both China and United States for the most part is created by unelected bureaucrats and outside technical experts from business and academia with some input from the public. For the most part there isn’t that much debate about what people want (i.e. make me rich), and so the debate becomes how to give it to them, and most people fall asleep when you start discussing this. The result of this is that the fact that China doesn’t have multi-party elections becomes irrelevant when it comes to economic policy. After all, who elected Bernanke, Paulson. Cox, or the heads of the major banks?
As far as US currency appreciation. It was a hot topic for a while because it involved a very unusual political alliance between textile manufacturers and Wall Street banks. Textile manufacturers are interesting because they are the only industry that would benefit from China-specific tariffs. Wall Street banks want open capital markets and would like RMB convertibility.
However both groups got what they wanted without a massive currency appreciation, and neither of them really care much about the issue anymore.
One other point is that I don’t quite understand why China has such a strong advantage in textile manufactures, but it is one piece of the puzzle in Chinese history. One big question is why China didn’t have an indigenous industrial revolution, and the fact that China is outcompeting the rest of the world in textiles and light manufactures right now is quite significant.
Seems to me that last Thursday , the u S Treasury said the press release for the TIC was going
to come out at 4:30PM EDT.
However , it did not come out.
Am I having a senior moment , or what ?
primordial dwarf