The April TIC data lends itself to a host of different headlines …
One might be “Foreigners love US Treasury bonds.” Foreign investors bought $80 billion of long-term Treasuries in April, and another $3.3 billion of short-term bills for good measure. Anyone who really believes that private investors bought $58 billion of Treasuries (including $48.52b bought by investors in the UK) hasn’t been paying close attention to the data. These are almost certainly central bank purchases. For all the attention that sovereign wealth funds have attracted, the real story of the past year – in my view – has been a flight to safety by sovereign investors. That flight – while understandable – has added to the dislocation in the credit market, not reduced it.
Another might be “Americans priced out of foreign markets.” US investors sold $10.3 billion of foreign securities in April. They also sold $1 billion in March, and bought $13b in February. That implies zero net purchases over the past 3months. A more charitable headline would be that Americans are taking profits on their investments abroad, or that Americans are now finding value in their own financial assets. The fall in US demand for foreign securities is clearly dollar positive.
Another is that “China bought a ton of US debt.” It bought $31.5b of long-term debt, while reducing its short-term holdings by $2.7b. That works out to $28.8b in net purchases – or enough to finance about ½ of the US trade deficit in the absence of any US capital outflows. The funny thing is that this almost certainly understates China’s true purchases of US debt. In the past few years, about ½ of the Treasuries purchased by the UK have been reallocated to China in the annual survey (see the June revisions to this series). We know that China’s reserves increased by about $80 billion (after adjusting for valuation gains) in April, so it is realistic to think that China’s true purchases of US assets were closer to $60 billion than $30 billion.
Another might be “Russia loses confidence in the Agencies.” That headline is perhaps overstated. But Russia certainly does seem to be shifting from short-term Agencies (other short-term negotiable securities in the data) and into short-term Treasuries. It sold about $9 billion of short-term Agencies and bought about $15 billion of short-term T-bills.
A final potential headline might be “the Gulf hires a magician to make its petrodollars disappear.” They certainly vanished from the US data. Net long-term purchases by the Asian oil exporters were only $0.3 billion, and short-term holdings only rose by $1.2b – for a total inflow of $1.5 billion. The Gulf is probably running a monthly current account surplus of $25 billion (off monthly oil export revenues in excess of $50 billion). There is a lot of Gulf cash floating around that isn’t showing up in the TIC data.
Rather than telling these stories with words, though, I thought I would illustrate a few of the stories with graphs that Arpana Pandey of the CFR has prepared using the TIC data. She has combined the TIC flow data with the survey stock data to generate an ongoing estimate of the US debt held by key countries around the world.
Let’s start with a chart showing the evolution of the UK’s holdings of Treasuries and Agencies over time.
Notice the pattern?
Note that the survey (which revises the June data) basically indicates that the UK’s real holdings of Treasuries and Agencies have been constant. The rise in the UK’s holdings that appears in between survey dates reflects the UK’s role as a financial center. Private banks in the UK buy Treasuries (whose purchase is recorded in the US data) and then sell those Treasuries to central banks (a transaction that doesn’t enter the US data). The large buildup of Treasuries and Agencies in the UK recently almost certainly reflects higher central bank purchases than recorded in the US data. Remember the enormous buildup of central bank claims at the Federal Reserve Bank of New York in April? The increase in the FRBNY’s official holdings in April was almost exactly two times larger than recorded central bank purchases in the TIC data for April ($67 billion v $34.1 billion in Treasury and Agency purchases). It is all due to London, more or less.
Now look at China. Arpana and I plotted China’s identified US holdings against China’s reserves and an estimate of China’s total foreign holdings — as I agree with Goldman’s Hong Liang that China’s government, counting the state banks and the CIC, already holds close to $2.1 trillion in foreign assets.
The US data indicates China holds $1,085 billion in various US securities. My personal view is that China actually holds far more — at least $200 billion more. Look at the buildup of Treasuries and Agencies in the UK. Historically much of the buildup in the UK has been reallocated to China. And I increasingly suspect that some financial flows from Hong Kong really come from China.
As more and more institutions manage some of China’s foreign assets — and as more use is made of external fund managers — even the slow-to-appear-but-more accurate survey data likely picks up less of China’s total holdings. Over time China may become sort of like the Gulf – whose dollar holdings are understated in even the survey data. At least in my view. More on that later.
Finally, Russia. Arpana and I have plotted Russia’s reserves against its recorded US holdings.
Here too the survey — at least the 2007 survey — has tended to revise Russia’s holdings up. Russia’s early 2006 diversification away from the dollar also shows up cleanly.
Russia clearly holds a much more conservative portfolio than China — with far larger short-term holdings, virtually no corporate debt and virtually no equities. Until recently though it never held any Treasury bills. That though changed in April. It probably doesn’t mean anything. But it still caught my eye.
Hey Brad,
Supposing the China PBoC were to go “cold turkey”, entirely avoiding the purchase of new US denominated Treasury bonds, the likely outcome would be a “hard crash” of the global economy. The China PBoC doesn’t have to even dump its cache of US Dollars for this catastrophic outcome to unfold. This is a very ugly scenario that I believe is in the best economic interests for the China PBoC to entirely avoid. An US recession is tolerable for the Chinese economy, but not a complete US economic depression and collapse. The China PBoC can’t afford to go faster in revaluating the yuan due to concerns of macroeconomic instability for the domestic economy and the Hong Kong SAR region that still has 95% of import-export invoices denominated in US Dollars. The Chinese yuan will probably gain about 10 percent in a year which is significant in foreign currency market terms and will translate into higher imported US inflation. Instead of always lecturing the Chinese on how to manage their internal sovereign economy, US policymakers would be well advised to be more productive addressing economic imbalances in the US economy that is contributing to the trade deficit with the world (ie. low savings, stupid Iraq war, Housing bubble, infrastructure decay, lax monetary policy and regulation, etc.).
DC — if China was a small country that didn’t export much to the rest of the world and wasn’t buying somewhere between $360b (US data for April, annaulized) and $720b of US debt/ US assets along side significant European assets, I would have some sympathy for the argument that China’s economic policies are an internal Chinese matter. but China’s internal choices impact the world (as do the United States), so they aren’t simply a matter of concern to China. The analysis of buying through london above implies that China is now financing a very large chunk of the US fiscal deficit — so it own choices are shaping the policy options available to the US.
Finally, the US and should do more to address its problems (energy policy strikes me as the obvious low hanging fruit). But do your really want the US to tighten fiscal and monetary policy right now? It would seem like the right time to have done so was in the 03-06 period …
The Chinese government’s “mandate from heaven” should extend only to its domestic sovereign economy. The rest of the world is not the immediate concern of the China government with over 70 million rural residents still living in relative poverty. Food in the mouth of the entire 1.2 billion population is the first human rights priority. Moreover, the US government has generally maintained a hostile relationship with the Chinese people since 1949.
If there’s one thing this global economic mess needs, it’s some market discipline and a good flush of misallocated capital. It would be a good thing for higher US interest rates. The US banks with dishonest Level-3 accounting need also to be flushed. Instead of Paulson and Bernanke at least telling the US banking industry to “clean up their act”, the US is following down the Japan footpath with “zombie” banks impaled by hidden bad debts.
I joked for years that there is a sign on the wall of the PBoC — “When in doubt, buy US Treasuries, and you are always in doubt.” Maybe somebody should stand up and say, “The Chinese are not sophisticated financially, they are just stupid. They just can’t figure out how to stop a massive momentum without making a potentially lethal (not figurative) mistake.
Brad, USA lives beyond its means, global imbalances continue to build, and you say “Finally, the US and should do more to address its problems (energy policy strikes me as the obvious low hanging fruit). But do your really want the US to tighten fiscal and monetary policy right now? It would seem like the right time to have done so was in the 03-06 period …” So one might argue that the way to address our debt problem is to borrow more, ala Ben. Avoid recession, keep partying, embrace moderation, and we can grow our way back home. Just what is going to stop the imbalances from growing?
Ditto to SW’s post. Looking at your graphs, it’s hard to visualize the correction.
I think the U.S. is much too worried about recession. Indications are that for the services-based economy it would be nothing like the downturns of old, where the accelerator-multiplier took hold. Others more dependent on goods production might have bigger worries about the a-m mechanism, however, such as China and Germany. (The latter, because they supply so much in the way of capital goods.)
I agree that 03-06 would have been a good time to take some of the medicine. But given that we failed to do so then, I’m not sure we should continue to build up debt now. Measures to keep institutions from catastrophic failure, perhaps, but not to spur domestic demand, which is already way ahead of domestic income.
Sorry if I’m being obtuse: let me try this again: a Chinese firm exports widget to US, receives dollars, exchanges dollars for rmb. A Gulf barrel of oil sold to the US for dollars is freely available to be spent. The dollars held by PBofC are not freely available to be spent; that is, what if the firm wants the dollars back? Obviously, some small portion can be invested and the profits from that investment spent. Is that your understanding?
It is time for a Public Central Bank that produces money based on the full faith and credit of the United States without the attendant debt.
The right to issue credit should be a province of the government, not private banks. Our Constitution says as much.
Don,
I’ve got to strongly disagree with the following statement “I think the U.S. is much too worried about recession. Indications are that for the services-based economy it would be nothing like the downturns of old, where the accelerator-multiplier took hold.” All indications are that the United States is entering a prolonged recession. The recent service and retail figures are being skewed by the $150 billion of checks sent out by the treasury. Retail sales in may were approximately $360 B. This marked a 1% increase Month over Month. This isn’t impressive at all considering that nearly every American received a $600 check in the mail. The US economy is facing difficulties on all fronts (oil, food, collapse of credit conduits, dollar weakness, and most importantly a debt maxed consumer). The fed can’t drive growth with a low interest rate, in an environment were banks are deleveraging (reference Lehmans $160B of asset sales in Q2) maxed out. The only hope I see is the globalization card and the emerging foreign consumer (i.e. China, Brazil, Russia, the GCC, etc.) The structural problem is that the US isn’t set up as the world’s work shop, worse the US’ prime export Agriculture was just hammered by weather. This is the shortest deck I think we’ve seen in a long time. What makes you optimistic?
I wonder if some of the vanishing billions from the Middle East might be finding their way to Chinese or Hong Kong custodians. Many bankers and fund managers in the ME will be watching the sanctions pending against Iran with a wary eye. Many are deeply suspicious of the politicisation of asset freezes, OFAC and money laundering which is too often distorted for political ends promoting US hegemony over banking and oil. Moving custody from Luxembourg to Hong Kong would be one way to keep assets safe as the Americans aren’t going to push the Chinese around.
Qingdao is probably right. One of the great problems with publicly available statistics about China (and Singapore, Korea etc) is that they re constructed to inform the public up to point, but never completely. Not enough is known about the structure of direct and indirect claims on those reserves. They are not all unleveraged state property.
These statistics do indeed give food for thought, but are not surprising.
First, some of this must reflect a move within CB investment away from commercial bank liabilities, which are now partially replaced by borrowings from the ECB and the federal reserve system. What happened to the Russian agengies is less clear but those are relatively small amounts. Second, there is no alternative for China and the Gulf states to keeping their reserves in USD (OK, China might stockpile some commodities as Taiwan did some 20 years ago but it is much too big to have that make n impact) , until de Euro area moves away from a virtually neutral trade position as oil import prices take their toll, but I do not expect that to absorb more than say USD 80-100 bn this year and not much more next year. In addition, Europe will probably adopt a strong anti-inflationary stance which will cool the economy (despite populist politicians grandstanding) and also reduce demand for oil somewhat and imports of consumer goods significantly.
There is hardly any room for changing the China+Gulf currency composition without major moves in EUR and JPY, which especially the former will try to block (especially given the need to raise interest rates more or less automatically within the ECB’s mission). It does not look like a story with a happy ending for the consumer driven economic policy, but perhaps the oil producers will see a reduction in level (negative growth) in demand due to the invention of energyless transport and perhaps the Chinese may be tempted to spend more of their export proceeds in creative ways (for instance paying a 100% deposit for a billion rounds on Pebble beach, to be played from the year 3000, to be deposited with Mr Paulson cs). Both would take the consumer off the hook. Barring that, this most peculiar trio on the tightrope may well end pretty soon. Where’s the safety net?
But earnestly, a strong appreciation of the RMB (the obvious type of snake oil to be used here) against the USD might help in one respect, it would allow the other East Asians, esp Korea And then perhaps China would finance the resulting Korean trade deficit, pse) and Japan with strong (but never materializing) capacity to absorb imports, to do the same. But perhaps that would grow, rather than shrink the US deficitdue to pricing power and it would certainly be inflationary. Complicated.
In conclusion, the gulf states and China should do with their claims on the OECD (ex Japan) what the OECD banks did in the 1980s with LDC debt: write it off. That would save the world economy
Rien Huizer wrote: In conclusion, the gulf states and China should do with their claims on the OECD (ex Japan) what the OECD banks did in the 1980s with LDC debt: write it off. That would save the world economy.”
I read your post, nodding in agreement several times along the way, until I came to this concluding remark. I was half-set on going on a frenzied rant (and in fact did), but I have to ask you if you are in fact joking?
Senior Chinese officials scold US government for Economic Mismanagement
http://www.iht.com/articles/2008/06/17/asia/17china.php
Chinese officials seem to be galled by the apparent hypocrisy of Americans telling them what to do while the American economy is at best stagnant. China, on the other hand, has maintained its feverish growth. Some officials are promoting a Chinese style of economic management that they suggest serves developing countries better than the American model.
In the last six weeks alone, a senior banking regulator blamed Washington’s “warped conception” of market regulation for the subprime mortgage crisis that is rattling the world economy; the Chinese envoy to the World Trade Organization called on the United States to halt the dollar’s unchecked depreciation before the slide further worsens soaring oil and food prices; and Chinese agencies denounced a federal committee charged with vetting foreign investments in the United States, saying the Americans were showing “hostility” and a “discriminatory attitude,” not least toward the Chinese.
“U.S. credibility and the credibility of U.S. financial markets is zero everywhere in the world,” said Joseph Stiglitz, a professor of economics at Columbia University who has sharply criticized the Bush administration and praised China’s economic management in the past. “Anybody looking at this from the outside says, ‘There’s been a lot of hot air coming out of the U.S., so why should we listen to these guys when they didn’t know how to manage risk?’ “
Glen, I might have been joking. Would that be inappropriate? But perhaps joking about this crazy situation is offensive. Apologies..
DC, your presentation is excessively formal. For those of us who have not added a Nobel Prize to our economics degrees, could you elaborate pse in a more formal way. I would love to see your models on financial system supervision. A challenging area of enquiry, but worthy of the attention of accomplished scolarship
Rien Huizer wrote: Glen, I might have been joking. Would that be inappropriate? But perhaps joking about this crazy situation is offensive. Apologies..
No apologies needed! I merely wanted to ask, because it would seem pointless going into the “why would China ever want to do that?” rant if you were simply joking. I assumed as much from the rest of your post.
Whether its offensive? I’m not offended, but I suppose its easy to see why the majority of the worlds populations, including China’s, would groan about ’some cheek’ should any US/Western politician of note ever voice such a suggestion.
DC, your presentation is excessively formal. For those of us who have not added a Nobel Prize to our economics degrees, could you elaborate pse in an even more formal way. I would love to see your models on financial system supervision. A challenging area of enquiry, but worthy of the attention of accomplished scolarship
Rien Huizer,
Please explain to us what the point is for the US having a capitalist system when the accounting sheet can be legally falsified with the blessing of US banking regulators. Will there be anything of “real wealth” economic value produced without either market or regulatory discipline? As I understand both Goldman Sachs and Citicorp are publicly traded corporations, yet the accounting balance sheet practices are deliberately obscure to mislead the public and investors. Level 3 assets that are marked to “an arbitrary model valuation” at both banking institutions represent almost half of capital assets. Why aren’t US Banking regulators at the Bernanke Federal Reserve demanding those hidden debts and financial losses be “marked to market”? Are only financial gains reported and Level 3 financial losses hidden. The Enronization of the US Financial market continues…
DC, Something must have gone wrong here, sorry for beating the same horse twice.
Glen, don’t worry, those were jokes (also the rounds on Pebble Beach; we all know it won’t be there in 3000 AD because the Danes will have caused the Greenland ice shield (part) of their country) to melt by smoking their pipes for too long). But, any better ideas?
DC, When I sent my apology for beating the same horse twice (you know the saying about dead horses) I had not yet received your latest post. This one is really way above my head. What accounting sheet is being falsified. What the heck is real wealth economic value (Are you referring to fair value accounting?). I guess that the bookkeepers at Citi and Goldman try to present a favorable picture, but after the appropriately mentioned Enron they probably prefer to sleep in their own beds. Assets have to be marked to something be it market (if there is a real one), depreciated cost (easy) lowest of cost or market (allows entrenched managements to hide earnings) or model (potential for fraudulent models being accepted by external accountants and regulators). Take your pick none is perfect. Or would you prefer a world without financial innovation, something like the 1960s?
Qingdao — the PBoC is like a bank. It has liabilities. It has assets. it needs some liquidity to guard against the possibility that some holders of RMB will demand $ (though it also has capital controls, so it can restrict who gets to buy dollars). But it can also assume that not all holders of RMB will want dollars, and in a context where almost everyone with $ is selling those $ for RMB, it can reasonably expect that its dollar holdings will continue to rise. In that context, it can easily invest a portion of its foreign assets in less liquid investments. some though do need to be held in liquid cash equivalents (think Treasuries).
Steve W — I deeply believe that the US needs to shift its basis of growth away from debt financed consumption. right now though the biggest risk is that consumption will fall off a cliff. Hence I support efforts to avoid a deep recession. The challenge will be removing the stimulus quickly enough.
here is what really worries me: a big shift by SWFs into equities puts upward pressure on equity prices, the dow soars and Americans move from borrowing against their homes to borrowing against their stock portfolios (a la the 90s). that would be in my view a bad outcome. right now tho the biggest risk is that consumption will really fall deeply.
note that the non-oil trade deficit is improving — and even the deficit with China is stable. things are changing, though the change has been masked by the rise in oil.
London Banker — Try Singapore. China’s capital controls preclude it from being an alternative to the US and European financial system. China would rightly think any gulf money making its way into China was really betting on the RMB – not a hedge v US sanctions.
London: Moving custody from Luxembourg to Hong Kong would be one way to keep assets safe as the Americans aren’t going to push the Chinese around.
On the other hand, China has no particular reason (other than oil) to be nice to Iran, and what the US can’t get by sticks, they can get via carrots. When China and US interests do converge, the result can be rather painful for anyone whose money gets stuck, such as the North Koreans found out a while back.
bsetser: note that the non-oil trade deficit is improving — and even the deficit with China is stable. things are changing, though the change has been masked by the rise in oil.
I don’t think it is masking. If global flows are driven by the US need for financing, then a decrease in the trade deficit with China will result in an increase in the trade deficit with someone else or an increase in interest rates.
What might be going on is that as RMB rises, exports to China decrease, but the US demand for funding has to be satisfied from somewhere, and that from somewhere are nations that still peg to the dollar (the Gulf Oil states). As pressure on the RMB decreases, pressure on the Middle Eastern economies increases requiring more central bank intervention to maintain the peg. To get the dollars they need, ME producers then increase the price of oil.
If the Middle Eastern economies de-peg, then interest rates will have to rise, and this will kill consumption in the US.
Brad, whether the SWFs inflate equity prices or consumption falls of cliff (love the former for a while, go to cash and then wait for consumption to go my way) both are possible and even at the same time. What would be the political implications, especially in an election year. Guess that old mate Infliation is going to take care of things, if necessary assisted with some reduction in trade mobility (non tariff of course). Writing this with the voice of Al Gore in the background..
The Iranians are moving their money to Malaysia which also has an Islamic Banking system. And the Malaysian government is more than willing to tell the US government to “take a hike”, as demonstrated when President Mohamad Mahathir told then VP Al Gore at an APEC press conference to stop interferring in Malaysian financial affairs. During the late 1990’s Asian Economic Crisis, the Clinton Administration was closely politically-connected to several Wall Street Hedge Funds that attacked the currencies of Southeast Asia resulting in the collapse of the Indonesian economy.
My gut feeling is that there is going to be this massive contraction in the US economy right after the election. We can see what happened in Bretton Woods II by looking at the end of Bretton Woods I, and one political strategy that Reagan used was “blame Carter for everything.”
DC: Why aren’t US Banking regulators at the Bernanke Federal Reserve demanding those hidden debts and financial losses be “marked to market”?
1) Hard to mark to market something for which there is no liquid market.
2) If you mark to market, you could trigger panic selling. You mark to market, this forces you to sell securities, this causes market prices to drop, this forces you to sell, this causes market prices to drop, and then the market tears itself apart.
3) Mark to market accounting also leads to some very paradoxical situations. For example, suppose I write a derivatives contract saying IOU US$1 million. If my credit is good, I can sell that contract for US$995,000. If my credit is bad, then that contract is worth US$500,000, since people are expecting me to go under.
So if I mark to market using FASB rules, the fact that my credit goes bad and I’m less likely to pay means that my balance sheet improves.
Cool….
JB: I’m not so optimistic, its just that I don’t think the real pain will be that great. I measure ‘real pain’ by unemployment.
Twofish
The situation you describe is exactly what lehman did do in 1h08 – marking down their own debt by 1B is why they showed a profit in 1Q. Nothing wrong in marking to market, but if they show a profit by marking their debt, maybe they should be consistent by marking all of their level 2/3 assets… presumably their reluctance is on account this would show them to be insolvent.
Don
did you know that from 1929 to 1930 unemployment only rose from 3.2% to 8.7%? Not even .5%/month. It did accelerate, to 16% in 31 and 24% in 32. Money supply is shrinking fast as banks reluctantly write down losses, quite similar to GD.
Brad’s graph of Chinese reserves looks unsustainable. Or, hm, if the Y-axis was not done in USD but oil and commodities, then maybe it would have looked quite stable. Hm, there is a correlation between the growth in prices of oil and commodities, and in Chinese reserves. Hm, if China uses its interest earnings to buy oil and commosities they cannot buy more now than a year ago. Hm, so what we are witnessing is either 1) a crashing dollar or 2) soon to crash prices of commodities and the market value of the Chinese reserve.
jkiss: Exactly. It is the post 1930 unemployment rates that I don’t think we need fear today.
Stefan — higher oil prices should reduce China’s trade and current account surplus in $ terms, not increase it. As a result they should be cutting into China’s reserve growth.
the puzzle is that this hasn’t happened. Reserve growth in asia ex China is down. But not in China.
Brad
Of course I cannot quantify it but as a model it’s quite interesting to think like this: China’s increasing reserves enable China to buy more oil/commodities – oil/c however is a limited resource x ton/day – in order to compete with China’s increasing purchases (i.e defend its own purchases) the US must print USD – then this circus goes on and on.
What will Bush’s financial stimulus do on the margin: 1) increaes the demand for oil 2) increase the demand for Chinese imports=increase the Chinese currency reserve.
95% of all revenue from Iraqi oil sales are deposited into the Federal Reserve Bank of NY (based on UN Resolution to prevent coruption – source http://www.iraqrevenuewatch.org)… if these funds are used to purchase treasuries, is it reflected in the tic data?
[...] data understates official purchases of Treasuries and Agencies and purchases by emerging economies. Remember all those London purchases? The pattern of revisions to foreign holdings of Treasuries suggests after the US survey data is [...]