Many argue that sovereign wealth funds have been a stabilizing force in global markets.
I keep wondering how anyone could possibly know.
The majority of sovereign funds do not report data on the composition of their portfolios. The increase in their funds over the past couple of years under management doesn’t seem to have made the world a more stable place — though you can argue it would be even more unstable absent their stabilizing presence. As far as I know, no one truly knows if sovereign funds have been piling into Treasury bills, European government bonds, bank deposits (if you can find a safe bank for big deposits) and money market funds along with everyone else — or if they have been buying US and European equities as they slide. I rather doubt sovereign funds have been buying a lot of toxic subprime debt off banks balance sheets. By contrast, we do know that the Chinese state banks, which are effectively playing with the dollars they received from the CIC as a result of their recapitalization,* have been reducing their holdings of risky US debt – -and perhaps otherwise reducing their exposure to the global financial system. We certainly don’t know if sovereign funds are going to start to pull funds from leveraged investors with poor recent returns — contributing to the “run” on hedge funds that Nouriel Roubini and others now fear — or if they are going to keep putting money into the hands of leveraged players.
But sovereign funds aren’t the real story. Central banks remains far more important. Unfortunately, we also know less and less about how central banks are impacting the markets through their reserve growth. There will be lots of analysis about the (small) fall in the dollar’s share of reported reserves in today’s COFER data release. Ignore most of it. There is a bit of data suggesting that those emerging economies that report data to the IMF started to diversify away from the dollar in q2 (but only after propping the dollar up in q1). But that doesn’t actually tell us much. Right now, the majority of global reserve growth now comes from countries that do not report data to the IMF — so we frankly simply do not know if the actions of those countries that do report data to the IMF are representative or not. Consider the following chart.
Here are a few numbers.
In q2, countries that do not report data to the IMF accounted for $82 billion of the $126b increase in global reserves. That actually understates the size of the “dark” central bank flows. The “other foreign assets” (think bank dollar reserves) of the People’s Bank of China increased by $74.5b, and the “non-reserve foreign assets” of the Saudi Monetary Agency increased by $29b. That brings total “dark” foreign asset growth to around $185b — and the total increase in global reserves to around $230 billion.
Between 60% and 80% of that likely went into dollars (I think countries that do not report data generally have a higher dollar share of their reserves than their more transparent cousins) — so “dark” dollar flows likely added between $110 and $148b to global dollar reserve growth. My baseline estimate is around $130b — which would bring total dollar reserve growth to around $143b in q1.