Brad Setser

Follow the Money

Cross border flows, with a bit of macroeconomics

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China hasn’t (yet) lost its appetite for US Treasuries …

by Brad Setser
January 8, 2009

Agencies, yes. But not Treasuries.

Keith Bradsher of the New York Times, citing Ben Simpfendorfer of RBS, argues that China’s government is likely to reduce its purchases of US debt.

“All the key drivers of China’s Treasury purchases are disappearing — there’s a waning appetite for dollars and a waning appetite for Treasuries, and that complicates the outlook for interest rates,” said Ben Simpfendorfer, an economist in the Hong Kong office of the Royal Bank of Scotland.

In some sense China’s purchases of US debt has to fall from its current level, as the current level of purchases is unsustainable in a context where China’s reserve growth seems to have slowed. The TIC data show a $44.4b increase in China’s US holdings in September and a $67.5b increase in October, with nearly all the increase coming from the rise in China’s short-term Treasury holdings.

That said, the available data from US suggest that China has yet to lose its appetite for either dollars or Treasuries, despite all the talk coming out of China.

We don’t have data for November or December, so the available US data points are by now a bit stale. But China’s $67.9b of purchases of Treasuries in October were exceptionally high ($43.5b in September isn’t shabby either). That level of Treasury purchases suggests, if anything, that China was shifting funds into dollars, as China’s recorded US purchases almost certainly exceeded China’s October reserve growth. I suspect that China wasn’t shifting into the dollar so much as holding more dollars in ways that register in the US data, so I would discount this data point a bit. Still, the raw October data doesn’t indicate a shift away from either the dollar or Treasuries. Rather the opposite.

Over the last 12 months, China’s recorded US Treasury purchases have topped $190 billion — a record. Most of the rise has come in the past few months of data. The US survey of foreign portfolio investment has tended to revise China’s purchases of Treasuries up, so $190 billion should be considered a minimum.

The TIC data for November and December isn’t available. But I suspect that the $136b increase in Fed’s custodial holdings of Treasuries over the last two months provides some clues about the evolution of China’s portfolio. Central bank holdings of Treasuries at the Federal Reserve Bank of New York continue to rise rapidly. As of now, I would argue the available evidence suggests that China’s appetite for Treasuries has increased in q4 — largely because of a fall in its appetite for Agencies. Let’s see what the November and December TIC data show.

Looking ahead, China’s official purchases of Treasuries will be function of three things:

1) The pace of China’s reserve growth. That will be determined by the evolution of China’s trade surplus, FDI flows and hot money flows. The World Bank expects China’s current account surplus to rise in dollar terms in 2009; I tend to agree. Oil will not average close to $100 a barrel in 09. The fall in commodity import prices will help to offset a (probably large) fall in exports. The fall in exports implies fewer imported components, and China’s domestic slowdown implies fewer imports too. But FDI inflows will slow and hot money flows clearly have reversed, so overall reserve growth (counting the increase in China’s hidden reserves) should slow.

2) The share of China’s reserves that are held in dollars. That is currently close to 70% best I can tell. I have no idea if China will want to continue to maintain that dollar share even as the US runs huge fiscal deficits. But now that China is pegging tightly to the dollar, I would guess that Europe would put a lot of pressure on China not to sell dollars for euros in a way that drives up the euro. That would be tantamount to driving the RMB down v the euro to support China’s exports to Europe. I consequently don’t expect a big change in the dollar share, but that is a huge assumption.

3) The share of China’s dollar reserves that are invested in Treasuries. That share is currently rising, big time. At some point though China will have brought its Agency portfolio down to an acceptable level and start to worry about the size of its Treasury holdings. So I wouldn’t expect it to rise forever.

Sum it all up and the pace of China’s Treasury purchases should fall from their recent monthly highs in 2009. But that is only because they currently are at such a high level. Even SAFE cannot sustain a close to $70b a month pace of Treasury purchases for all that long. Not unless it really plans to run its Agency portfolio down to zero.

One last point: Hot money has to go somewhere and hot money outflows from China could go into the dollar. If Chinese reserve growth is below China’s 2009 current account surplus, private Chinese investors will be building up their foreign assets. China’s government won’t necessarily be the only Chinese buyer of dollars. Or, for that matter, euros.

Data on China’s recorded long-term purchases are here, data on China’s short-term holdings are here).


  • Posted by cdr

    also, hot money could very well be made to “stay put”.

  • Posted by DJC

    Can the China PBoC realistically buy $1.3 trillion of US Treasury bonds in 2009? That is the low estimate of the US budget deficit in Fiscal year 2009 by the Obama administration. It should be perfectly clear that it is increasingly beyond the economic capacity of the Chinese government to finance US budget deficits and bailout the US Economy. It has taken 2 decades for the China PBoC to amass $1.3 trillion in dollar reserves; now that amount will be required to finance the US deficit for a single fiscal year. Even if 100% of Chinese savings were diverted into US Treasury bonds, it won’t be nearly enough to finance the US budget deficits. Clearly we are living in uncharted economic waters.

    Obama uses $1.3 trillion budget deficit figure

  • Posted by bsetser

    DJC — You are right, China isn’t able to buy $1.2 or 1.4 trillion in treasuries. Deficits on this scale have to be financed by Americans and only make sense in a context where private spending is falling (i.e. consumption is falling) and private investment is falling.

    Even if china purchased as many treasuries in 09 as in 08 ($300b in my view including flows trough london, $200b in the existing unrevised data) it would finance a smaller share of the deficit.

  • Posted by Indian Investor

    I’d like to state my understanding as to how deficits are financed through monetization of credit. (This explanation is at the secondary school level)
    The US Govt. has revenues, from items such as tax collections. This can be termed as public income. The US Govt. has expenses on items such as expenses to build new highways and refurbish Govt. buildings and public schools, for instance.This can be termed as public expenditure. When the Govt.’s revenue is much less than its expenses, then you get a deficit. This deficit can be financed through Govt. borrowing. Govt. borrowing is by issuing Treasury securities. When the Treasury issues securities, anybody can buy them through primary dealers, including foreign central banks, and such like.
    The Federal Reserve Bank is authorized to have dollar bills printed for the purpose of purchasing Govt. securities. So the Fed can pay a nominal fee of 4c per bill and purchase Govt. Securities from the market. This activity is known as monetization of credit.
    When monetization of credit happens, Treasury securities go into the Fed’s balance sheet as its holdings. Fresh dollar bills are paid to the private/foreign etc previous holders of the Treasury securities. Overall, the currency in circulation increases.
    Monetization of credit is consistent with quantitative easing, as long as you define quantitative easing as a policy to increase money supply beyond the target fed funds rate tool.
    Monetization of credit will lead to higher inflation due to the increased money supply. This should not be a concern right now since the US economy is facing deflationary pressures otherwise.

    So I have two doubts here and I would be very glad to know the solution:

    1) Is this understanding of the monetization of credit process broadly correct for the purpose of our analysis?

    2) Would monetization of credit suffice to finance the US Govt.’s deficits arising from stimulus spending?

  • Posted by DJC

    From Bloomberg,

    “China is going to buy less Treasuries but only because foreign exchange accumulation is not going to be so large,” he said. “It’s not as though they are shying away from Treasuries and buying something else.”

    China’s currency reserves, the world’s largest at about $1.9 trillion, recently fell for the first time in five years, Cai Qiusheng, who works for the State Administration of Foreign Exchange, said last month. With less dollars flowing into the country, China’s need to buy U.S. debt is reduced.

  • Posted by Indian Investor

    There is another, much more fundamental doubt in my mind. In a world with market determined exchange rates, when one country exports to another, the exporting country’s currency has higher demand. This is because exporters ultimately have to be paid in their own currency.
    Similarly demand for an importing country’s currency falls because importers ultimately pay out in their own currency.
    The process should repeat itself and an equilibrium will be reached when exchange rates are such that there is purchasing power parity amongst all currencies.
    My observation is that the US dollar exchange rate isn’t anywhere close to its intrinsic purchasing power, in any country that I can actually name.
    For instance a one dollar bill will buy you a cup of coffee at best in most parts of the US. One US dollar is trading at INR 48.
    INr 48 can buy you a very good breakfast in a big Indian city. a similar cup of coffee can be purchased in India for INR 4.
    I realize that a professional approach would be to look at CPI and PPI in the two countries. But I think it’s reasonable to think that the US dollar is overvalued at least 900% in the INR/USD exchange rate.
    RBI currency interventions don’t seem to explain this huge difference between purchasing power and the exchange rate.

    So I would be glad if anybody could explain the broad reasons for the exchange rates as they are. I’m aware that there have been many complicated mathematical models for exchange rate determination and that they are all failures.
    But I’d like to know the basic reasons/factors behind this wide difference, if any other than the oil geopolitics and the PBoC interventions.

  • Posted by Steve W

    bsetser wrote — You are right, China isn’t able to buy $1.2 or 1.4 trillion in treasuries. Deficits on this scale have to be financed by Americans and only make sense in a context where private spending is falling (i.e. consumption is falling) and private investment is falling.

    Now I am confused. I thought the justification for the “stimulus” was to increase consumption and private investment. Is this an example of “moving boxes around” with no real economic benefit?

    Please disabuse me of my naivete.

  • Posted by bsetser

    absent the stimulus, there would be a much larger fall in economic activity — i.e. the increase in gov. spending offsets the fall in private spending and investment, stabilizing the economy. and by doing rebates and the like the government can also reduce the scale of the fall in private spending.

    a lot of this is accounting tho —

    if the government refunds payrolls taxes and private consumption goes up relative to where it would otherwise be, there is a rise — v a baseline where private consumption is falling — in private spending that if financed by a rise in the government’s deficit.

    I wouldn’t get too hung up on this — I was trying to explain how the national income accounts add up at the end of the year.

    say in 08 the current account deficit is 5% of US GDP and the fiscal deficit is 3% of GDP. since the current account is savings – investment, that implies that the us is investing 5% more than it saves. the savings and investment balance can be disaggregated into the public sector’s balance and the private sector’s balance. this is a bit sloppy b/c the fiscal deficit and the public sector’s savings and investment balance aren’t quite the same thing, but if you allow me a bit of lee way, the private sector deficit in 08 had to be 2% of GDP. a 3% of GDP deficit in the public sector and a 2% of GDP deficit in the private sector was financed by a 5% of GDP net capital inflow from the world (another way of expressing the current account deficit is that there is a capital account surplus from net capital inflows).

    for 09, a 8% of GDP fiscal deficit and a 4% of GDP current account deficit only works if the private sector’s net savings is around 4% of GDP (v a deficit of 2% of GDP). That implies a big fall in private spending and investment even with the stimulus …

  • Posted by Albion

    So China UK and the Caribean are buying the US Treasury Notes and so are the Primary dealers “Follow the money”

    Treasury Opens Probe as Trading Failures Hit Record (Update2)

    By Rebecca Christie and Liz Capo McCormick

    Nov. 7 (Bloomberg) — The Treasury Department is reviewing the trading of two- and five-year notes after a scarcity in U.S. government securities triggered by the credit crunch led to a record level of failed transactions.

    The probe comes two days after Karthik Ramanathan, the acting assistant secretary for financial markets, told bond dealers to fix chronic settlement problems or submit to tougher regulation. The Treasury has conducted at least nine such reviews, known as “large position reports,” to monitor trading and guard against market manipulation since 1997.

    The overnight repurchase, or repo, agreement rates for two- and five-year notes have traded at about 0.05 percent since the start of October, among the lowest of all Treasuries. When demand for a security rises, traders lend cash at a wider spread below the federal funds rate to obtain the needed securities, charging even zero interest at times. Failures to deliver or receive all Treasuries in the repo market climbed to a record $5.31 trillion in the week ended Oct. 22.

    “The Treasury is very concerned and wants the market to be fluid and liquid,” said E. Craig Coats Jr., co-head of fixed income at Keefe, Bruyette & Woods Inc. in New York. “They are looking at these position reports from the standpoint that if you have one person that is just hoarding a security and disrupting the market, then the Treasury is going to have a conversation with them to find out why and encourage them not to.”

    `Elevated Level’

    The Treasury asked for information on the 2 percent note maturing Sept. 30, 2010, and the 3.125 percent note maturing Sept. 30, 2013. Bond dealers or investors with “reportable positions in either of these notes equal to or exceeding the $2 billion threshold must submit a separate report for the security to the Federal Reserve Bank of New York” before noon on Nov. 14, the Treasury said in a statement released in Washington.

    “The request for information this morning pertains to the elevated level of fails to deliver in these particular securities for a prolonged period of time,” Treasury spokeswoman Brookly McLaughlin said. “This request is another way, beyond speaking with market participants, to ensure that Treasury understands current market conditions.”

    The large position reporting program was established in 1996 in the aftermath of the Salomon Brothers bond market scandal. The confidential reports requested today are for positions held on Nov. 6 at the close of business. McLaughlin declined to comment on the results of previous position reports.

    Trading Fails

    Failed trades, or “fails,” have been a problem since 2003, when supply shortages first collided with the technical effects of low interest-rate levels.

    “The Treasury is definitely interested in putting an end to these trading failures,” said Bulent Baygun, head of interest-rate strategy in New York at BNP Paribas Securities Corp., a unit of France’s largest bank. “There isn’t a whole lot that they can do besides reopening issues and they expressed this week a big aversion to” doing that.

    Securities that can be borrowed at interest rates close to the Fed’s target rate are called general collateral, while those in the highest demand are called “special” by traders because rates on loans secured by these securities are lower.

    The overnight general collateral repo rate was 0.25 percent today, which match where the overnight fed funds rate traded. The central bank’s official target rate for overnight loans is 1 percent.

    To contact the reporters on this story: Rebecca Christie in Washington at; Liz Capo McCormick in New

  • Posted by don

    “Looking ahead, China’s official purchases of Treasuries will be function of three things:”
    I would say these things are
    1. The amount of currency purchases needed to keep up the trade surplus and prevent declining economic activity in China.
    2. The amount of foreign pressure exerted to discourage such currency mercantilism.
    3. From 1 and 2, plus considerations of returns, the amount of treasury purchases relative to other foreign reserve assets.

  • Posted by Christian


    Yes that NYT article caused quite a stir this morning on CNBC. I instantly knew it was fishy as I am a fateful reader of your blog. I wish journalists would double check their assumptions more often when it comes to important matters…

    Having said that, you mention 70% of China’s foreign reserve is in dollars. Do you know if this as been going up or down in the last years? Also do you have more information on what constitutes the remaining 30% and how that fits into their strategy of pegging to a basket of currencies in the future?


  • Posted by DJC

    600,000 Unemployed Workers leave South China’s industrial heartland: govt

    BEIJING, Jan 8 (AFP) Jan 08, 2009
    About 600,000 migrant workers left south China’s industrial heartland last year as the economic crisis caused exports to shrink and forced factories to close, a senior official said Thursday.

    The number of migrants departing Guangdong province, one of the world’s top makers of toys and electronic appliances, accelerated through 2008 as the global situation worsened, said provincial deputy governor Huang Longyun.

    “This year the situation is more serious than at any other time since the start of the decade, indeed since the Asian financial crisis,” he told a briefing in Beijing, referring to regional turmoil that broke out in 1997.

    By the middle of last year, when the economic crisis was still in its embryonic stage, only 143,100 workers had left Guangdong, but the number reached half a million at the end of October and has now hit 600,000, he said.

    Guangdong’s export sector has been one of most important factors in China’s phenomenal economic boom, and it has been helped by migrant workers who have gone to the province from China’s destitute interior in search of better lives.

    Huang did not give an overall figure for migrant workers in the province, but earlier data said they numbered between 25 and 30 million.

    The situation is likely to become even worse in the next few months, according to Zheng Zizhen, an expert on population issues at the Guangdong Academy of Social Sciences, a government think tank.

    “If the economic conditions continue to deteriorate, I would not be surprised if there are one million to two million more migrant workers leaving the province this year,” he told AFP.

    The release of the data comes as China’s communist leaders grow increasingly concerned about the impacts the economic crisis may have on social stability in the nation of 1.3 billion people.

    The official jitters were expressed in unusually candid terms this week in the authoritative weekly magazine Outlook, published by the state-run Xinhua news agency.

    The magazine warned of the rising risk of social disturbances, or “mass incidents”, pointing out that nationwide 10 million out of 120 million migrant workers had lost their jobs.

  • Posted by interesting

    Conditions in China are much worse than anticipated by western media.

    It would be wise for China to issue another massive internal stimulus plan in early 2009 and slowly relinquish its appetite for US T-bills.

    Regardless, the current monetary system is terribly flawed.

  • Posted by bsetser

    please do not paste in long bloomberg articles.

    christian — my work would imply that $ share was falling a tiny bit before August and since has been rising. But I don’t trust my work as it is keyed off the survey data and the last data point in the survey is from June 2007 — so it is by now way dated. the model may not be accurately calibrated. China also doesn’t seem to use US custodians for its corporate debt portfolio, so i have trouble tracking it — so i cannot tell if the small slide in China’s $ holdings that was seeing simply reflected higher corp debt holdings v treasury and agency holdings or if it was real.

    I have a detailed paper on china coming out in a week or so (once the q4 reserves data is out) that will go into this in detail

  • Posted by Darrell Balmer

    Will foreigners, particularly China, reduce US government debt holdings and/or avoid new US government debt investment?

    China grew its dollar reserves as follows. China exported goods to US companies. US companies paid for goods with US dollars. China’s government required Chinese companies to exchange these US dollars for Chinese currency at a government managed exchange rate. The Chinese government used these US dollars to invest primarily in US government debt.

    Here are some questions. Unless China changes this practice, as long as it exports more to the US than it imports, won’t US dollar reserves increase? How could China slow or reverse the increase in US dollar reserves while exports to the US exceed imports from the US? It could exchange dollars with other countries or other entities (individuals and corporations) through the market. But it can’t exchange dollars with the US government because the US government does not hold other currencies. It only has dollars to offer in such an exchange. If China were to exchange dollars with other countries or other entities those countries or entities increase their dollar holdings by the amount that China reduces it holdings.

    Broaden this logic globally. Conceptualize the world as two entities, the US government and everything else. Everything else would include all non-US governments, all corporations including US based corporations and all households including US households. The everything else entity holds and trades all currencies including dollars. The US government deals exclusively in dollars. The US government buys products and services and pays US government employees exclusively in dollars. The US government obtains dollars through taxes, borrowing and dollar creation (printing). The total dollars held by the everything else entity can not decline unless the US government absorbs dollars by taxing more than it spends. In other words, the US government would have to run a surplus and would not be borrowing or creating dollars. It would be reducing the deficit. This situation is unlikely for the foreseeable future. For any other situation, the total dollars held by the everything else entity must increase so long as the US government spends more than it taxes and borrows.

    What happens if the everything else entity in aggregate finds dollars undesirable? In aggregate they are stuck with the dollars already held. They can only trade among the everything else entity. When US government securities mature they can decide to not invest again in US securities but the US government sends dollars at maturity for which they must find a home. If they shift to equities or corporate bonds traded in US dollars, they simply shift who holds the dollars and who holds the equities and corporate bonds. They can demand higher interest rates for new US government securities. But the US government can say fine and continue to increase the dollars held by the everything else entity.

    Conclusion: If we split the everything else entity into the foreign everything else entity (foreigners) and the US everything else entity (US households and businesses), foreigners can reduce its existing and new US government debt holdings only to the extent the US households and US businesses increase their existing and new US government debt holdings.

  • Posted by gillies

    i like the idea of the chinese building a strategic oil reserve. it puts a bit of a floor in the oil price. it helps to stabilise the politics within the oil producing nations, and the oil producers – saudi arabia and the gulf in particular – would pass on the dollars to buy the treasuries.

    look at the gulf stream for inspiration : warm water going one way – cold water going the other way – big loops around the sargasso sea – and still the atlantic remains generally flat. no hills of salt water anywhere.

    the only real and lasting problem is for those who still wish to get something for nothing. the game’s up for them, for the time being. those who want to trade something for something – oil for grain, rice for aircraft, timber for computers, will find a way.

    frugal is cool. finding a bargain is as satisfying as making a killing. if you can adapt to expansion you can adapt to contraction.

    notice outside irish cafe : “credit crunch special – toasted sandwich and a coffee €6.75.” work it out in dollars. if that is the credit crunch price – this crash has some way to go yet.

    when you see a far eastern nation with massive savings, you do not have to create a new scam, ponzi trick, or accounting wheeze. try some empathy ; these guys have savings. we can part them from some of it if we use our heads.

    now, what do they really need . . . ?

  • Posted by DJC

    Gilles: these guys have savings. we can part them from some of it if we use our heads.

    now, what do they really need . . . ?

    DJC: The US recession-depression will be much worse than Japan’s lost decade. The Japanese retained the highest savings rate in the world to carry through their prolonged recession. The US Economy doesn’t have that luxury. The National Savings Rate is “rock bottom” zero for the US population.

    Obama’s $1.3 trillion budget deficit plan to jump start the US Economy is ridiculous. Not a single dollar of “real industrial economic wealth” will be created. The US Economy doesn’t need anymore McMansions, Gas-guzzler SUVs, Shopping Malls, Office buildings, etc.

  • Posted by Ying


    It is moving boxes around if the administration just try to spend more money and keep everybody happy. They are moving into the territory that politicians allocate resources for the whole society instead of the private sector. I hope these selected politicians are smart enough to make wise choices for American workers, not the ones who speak loud.

  • Posted by don

    notice outside irish cafe : “credit crunch special – toasted sandwich and a coffee €6.75.” work it out in dollars. if that is the credit crunch price – this crash has some way to go yet.
    Divide by 1.25 (on average, euro prices shluld be higher by the amounet of the VAT). Divide by 1.1 (my guess as to euro overvaluation)
    Dollar Price = $4.90 – not so unreasonable.
    Darrell Balmer –
    Chinese reserve accumulation is not an endogenous variable, but Chinese exports to the U.S. is. If China is accumulating reserves, this is de facto evidence that it is keeping its currency undervalued. The way it should work is the Chinese exporter finds a buyer for his dollars in the private market. Then, no reserve accumulaton and no currency manipulation.

  • Posted by Michael


    I do have some doubts about to how great an extent domestic investable savings will increase simply because consumption decreases.

    Sure, “savings” is arethmetically defined as income minus expenditure. But in the first place, both income and expenditure can decrease in an economic contraction, producing little or no savings at all; in the second place, if the income does not decrease as much as expenditure and the savings is used to pay down existing debt (“deleveraging”) there is no net investible savings generated to buy NEW debt, such as Treasuries for finance expanded fiscal deficits.

    Worse, even if domestic savings increase and are invested by loaning money to others rather than by paying down existing debt, there is no guarantee that those savings will be loaned exclusively to the U.S. Treasury. Right at the moment, Treasuries are the preferred place to park savings, but that is an acknowledged – by you among others – fear-based reaction. Is that a sound basis for projecting future domestic funding for an explosion of long-term fiscal debt? Especially when the official position of all politicians and economists is that savings is the enemy and only re-vivified consumption growth can save us?

    Those of us who for a decade shook our heads at the stupidity of ever-greater sums being loaned at ever-lower rates of return to finance consumer borrowing (“How much are these idiots going to lose when the music stops?”), are now shaking our heads at the stupidity of ever-greater sums being loaned at ever-lower rates of return to finance government borrowing. Whether we’re talking foreign or domestic customers of Treasury debt, it’s strictly caveat emptor.

  • Posted by jorgerl

    Darrell Balmer : EXACTLY!! The frustrating thing is people would describe what you stated as “theory” when in fact it is an accounting ENTITY there is no other explanation to how the deficit/external debt works.

    The only thing I disagree with is that even if the “everything else” world demands a higher interest, the U.S. does not have to give it , AND THEY STILL WOULD BE ABLE TO SELL EVERY BOND!

  • Posted by jorgerl

    “The US government obtains dollars through taxes, borrowing and dollar creation (printing).” wrong, Government spending is not revenue constrained, the govt. can only get $ from Taxes or selling national property, it CREATES $ by DEFICIT SPENDING.
    It spends first, borrows what it did not tax through treasuries later.

  • Posted by don

    One thing I can practically gurantee is that if China starts to divest itself of dollars, it will really ‘lose its shirt’ unless it spends the money on goods and services immediately. Suppose it buys euros – the euro area is already in huge trouble – it dropped two dollars on the announcement that Germany’s exports dropped 10% (this is just the beginning and the effect of a jump into euros would make it worse). An attempt to shift into yen may give that island’s economy such a dunking that it would have a really hard time coming back up. Sudden purchases of gold or oil would lead to similar dramatic overpayments as the dollar fell and the pric of the purchased dommodities rose. I am reminded of the central bank decisons to divest themselves of gold back when the price was $200 per ounce.

  • Posted by don

    “the euro area is already in huge trouble – it dropped two dollars”
    Sorry, it dropped two cents on the announcement – still quite an amount for anyone with a futures contract.

  • Posted by Indian Investor

    I think one of my thoughts could probably be very useful to your forthcoming report, provided you’re able to check out data that indicates it’s correct.
    My analysis is that the Government of India has actually found, and has probably been following a way to use forex reserves for domestic fiscal spending. It seems to me that this is accomplished through the domestic petroleum pricing.
    Indian Oil Corporation and other domestic state owned oil companies sell petrol and diesel to consumers at Government-mandated prices, and the state owned oil companies are loss-making and liquidity starved. Yet the consumer price of petrol is higher than international gas prices.
    This is due to Central Government and State Government taxes on petrol and diesel.
    According to me this shows that the Government is probably exchanging dollars which would have other wise accumulated in the forex reserve for tax revenues denominated in Indian Rupees.
    China is reportedly facing a severe unemployment problem and I’m trying to reason out how the Chinese Govt. can deal with the current crisis in a non-prtoectionist manner. According to me the Chinese can subsidize imports of oil and various other commodities. This can allow the forex reserve dollars to be exchanged either for lower prices or for tax revenues in RMB.
    As I said, the data needs to be checked out to see if this analysis is correct, as of now it’s just a thought.

  • Posted by fy chi

    Astounding! Does anyone know what’s going on?With all these good ideas and penetrating analyses, it appears nevertheless no one is really in the know as to what’s going on with the world economic situation, except that it’s bad and getting worse…we need to have a handle on the real issues before a solution is forthcoming! Where’s the leadership, either political or analytical?

  • Posted by Indian Banker

    I think you have not differentiated.. oil refiners and oil marketing companies.

    Oil Marketing companies can sell OIL BONDS which are bought by RBI so that marketers wont suffer when prices are too high in international markets.

  • Posted by geert

    @Don 7,43
    “If China is accumulating reserves, this is de facto evidence that it is keeping its currency undervalued. The way it should work is the Chinese exporter finds a buyer for his dollars in the private market. Then, no reserve accumulaton and no currency manipulation.”

    Try to work this out and you will be surprised.

    Who are you going to sell the $ to and what is the other party going to do with the $? If China sells $ and buys € then it still has reserve accumulation, no? Or is the US going to sell its gold for its own printed paper? Or must they buy foreign assets with their dollars, but does it solve the problem because then someone else is stuck with the $ and must do something with it. Or maybe the FED can start printing Yuans.

    The accumulation of $ is the evidence that the US has the perverse privilege of being able to print international money (the Gaulle knew already). All the rest is a decoy to hide that privilege.

  • Posted by Egg Horton

    Brad expects net private savings in the US to amount to about one trillion dollars in 2009. I think I have an island you might like to buy.

  • Posted by Bob_in_MA

    “One last point: Hot money has to go somewhere and hot money outflows from China could go into the dollar.”

    But not necessarily into Treasuries, more likely banks. My understanding is a lot is heading to Hong Kong banks. (Which may provide support for the US$ indirectly because of the hard peg of the HK$?)

    But it doesn’t help us peddle $1.3T in Treasuries.

    I think you are a little too sanguine in your expectations about China continuing to buy Treasuries. Let’s face it, no one knows what sorts of jolts are ahead of us. The scenario whereby China keeps buying hundreds of billions of $ in Treasuries is just one of many possibilities.

  • Posted by bsetser

    Bob in MA — not just HK banks, but b/c the inflows are putting upward pressure on HK’s currency, they end up at the HKMA, which ends up buying, guess what, Treasuries!

    My argument is a bit more nuanced than you give it credit for tho. I fully expect the pace of the government of China’s purchases of treasuries to fall as reserve growth slows. right now it is being held by by the reallocation out of agencies to treasuries. Current purchases (50-70b a month — they are HUGE) are unsustainable.

    At the same time I don’t see china’s trade surplus or its dollar peg going away soon (the dollar peg seems to be tightening) and barring a large policy shift in china, i suspect that limits China’s options …

    a deval of the rmb might increase hot money flows and reduce reserve growth, but it would tend to push up the trade surplus and thus sustain high levels of chinese financing of the world.

  • Posted by Bob_in_MA

    “…a deval of the rmb might increase hot money flows and reduce reserve growth, but it would tend to push up the trade surplus and thus sustain high levels of chinese financing of the world.”

    But what if the devaluation became self-sustaining, via hot-money flows, so there wasn’t a need for China to purchase treasuries?

    In early 2007 the Vietnamese dong was considered one of the undervalued currencies ( and a year later it was toast. How many treasuries has Korea needed to buy recently?

    I had 5% of my liquid assets in an rmb account until February until I saw how quickly things turned with the dong and yanked it out.

    China is headed for something really bad and it has about as good a safety net as we had in 1930 (in some ways worse), why wouldn’t people pull their money out?

    Again, I’m not confident you’re wrong, I just see it as one possible outcome.

    Clearly the game has changed and there’s little doubt that the Bretton Woods II system won’t survive. The question is just when and how will it die?

  • Posted by don

    Without CB intervention, Chinese exporters would do exactly what exporters in every other country with a convertible currency does – sell the dollars on the open market for the local currency. There is no excuse for the transaction to go through the central bank. If there is a surfeit of dollars, the price of the dollar will fall (the value of the yuan will rise) until the problem corrects itself.