Brad Setser

Follow the Money

Cross border flows, with a bit of macroeconomics

More bad news from Asia

by Brad Setser Friday, February 27, 2009

Even the portions of Asia that relied less on exports aren’t looking quite as good any more. The FT reports that India seems to be decelerating. Malaysia didn’t grow in the fourth quarter. And “Thailand’s exports and industrial production fell at a record pace in January.”

Frederic Neumann, Asia chief economist at HSBC, told the FT

The collapse in Asian exports over the fourth quarter was “nothing short of breath-taking”, said “Economic models and experience suggest that financial turmoil tends to transmit far more gradually into the real economy than has occurred this time around. In fact, the severity and rapidity of the fall in output exceeds anything we have ever seen before.”

That seems exactly right to me.

Throw in some indirect evidence that China slowed quite sharply at the end of last year, and there isn’t yet much evidence that Asia is going to help pull the rest of the world out of its slump. Right now Asia’s sharp deceleration implies it is adding to the forces that are pulling the global economy down, not propping it up. The IMF’s global forecasts — which presume that growth in India and China keep output in the emerging world from falling as sharply as it is expected to fall in the mature economies — consequently still seem on the optimistic side.

UPDATE: BNP Paribas’ chief economist also finds the IMF’s forecast too optimistic, and now anticipates negative global growth for 2009. BNP Paribas also now forecasts the downturn in growth in the emerging world will be far larger than the downturn in the 97-98 emerging market crisis.

Who bought all the Treasuries the US issued in 2008? And who will be the big buyers in 2009?

by Brad Setser Thursday, February 26, 2009

And just how important is China — clearly now the largest single holder of Treasury bonds — to the market?

Both questions matter more than ever — to the market, and to the US government.

There is no doubt that central banks and sovereign funds, led by China’s reserve managers, were huge buyers of Treasuries in 2008. The work I have done with Arpana Pandey suggests that central banks bought close to $600 billion Treasuries in 2008 — with China accounting for a bit over half the total. Total central bank reserve growth likely was around $1 trillion in 2008 (though obviously it was much higher earlier in the year than later in the year; $600 billion is consequently a plausible sum. That estimate is far higher than the number reported in the TIC data — but the TIC data also is known to under count central bank purchases. Watch what happens when the survey data comes out. $600 billion is also a record. Back in early 2004 — at the peak of Japanese purchases — total purchases of Treasuries only reached $300 billion.

The US must then now be completely dependent on the central bank bid.

Not really. Total ‘marketable” Treasury issuance – if the marketable Treasuries that the Fed sold to finance its lender of last resort activities are counted as increase in the outstanding stock of marketable Treasuries — topped $1.6 trillion in 2008.

That implies, if the Pandey/Setser estimates for official purchases are right, that private investors snapped up more Treasuries than the world’s central banks. Central bank demand accounted for a far smaller share of total issuance than in the past few years. In 2007, for example, central bank purchases easily exceeded total issuance. The big increase in demand for Treasuries in 2008 came from private investors in the US. The “money” graph:

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More bad news from Japan

by Brad Setser Wednesday, February 25, 2009

Japan’s January exports are down 46% y/y. The Wall Street Journal:

Japan’s trade deficit widened to its biggest level on record in January, as a global economic downturn sapped overseas demand for Japanese goods and caused exports to plunge 45.7%, the fastest decline ever. The data indicate that Japan’s economy, which in past recessions relied on exports to recover, won’t be supported by overseas demand and, if anything, will continue to suffer from the collapse in that demand. Analysts say there are few signs exports will pick up any time soon.

Japan’s January trade deficit came to ¥952.6 billion ($9.84 billion) in January, the Ministry of Finance said Wednesday. While the figure was better than analysts’ consensus forecast of ¥1.15 trillion deficit, it was still the biggest on record. It was also the fourth straight month Japan posted a trade deficit.

I never thought that a big fall in commodity prices would coincide with a big fall in Japan’s trade surplus. But right now Japan’s manufactured exports are falling even faster than Japan’s commodity-heavy import bill.

China’s 17.5% y/y fall in its January exports is far smaller than the falls in the exports of other major Asian trading powers. Japan is down 46%. Korea, 33%. Taiwan, 44%.

That strikes me as one of the key puzzle’s of today’s global economy. One potential explanation is that China is taking market share. One potential explanation is that the big fall in China’s exports is in the pipeline, as China is the last stop in Asia’s assembly chain. And one potential explanation is that a significant domestic downturn in China is adding to the downturn in the exports of other Asian economies.

Update: Jon Anderson of UBS argues that China’s electronics exports have collapsed in line with the exports of the rest of Asia. However, China’s low-tech exports — shoes, textiles, toys, furniture — have held up well. To put it just a bit differently, he argues that a lot of the press coverage about the fall in China’s low-end exports and the resulting fall in employment has the story wrong. China’s low-end, labor-intensive exports are doing (relatively) well compared to China’s electronics assembly business. He also argues that the fall in investment in Chinese real estate and related materials has added to the woes of other Asian exporters.

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Unintended irony

by Brad Setser Wednesday, February 25, 2009

From a Tuesday Wall Street Journal story on Citigroup’s efforts to raise common equity:

Citigroup officials hope to persuade private investors that have bought preferred shares — such as the Government of Singapore Investment Corp., Abu Dhabi Investment Authority and Kuwait Investment Authority — to follow the government’s lead in converting some of those stakes into common stock, according to people familiar with the matter.

Emphasis added

There is a difference between a minority stake held the investment arm of a government that doesn’t regulate a bank or backstop the banks’ liabilities and a large stake held by a banks’ home government. But it is striking that none of the “private investors” mentioned in the Wall Street Journal are actually, well, private investors. Sovereign wealth funds are at best a hybrid.

China for example has made it clear that it hopes that the US will protect at least some of its investments from the risk of losses. China’s Vice Premier Wang Qishan told Hank Paulson:

“We hope the US side will . . . guarantee the safety of China’s assets and investments in the US”

He may have just been thinking of the Agencies … but he also may have had a few of China’s other large stakes in mind. The classic response is that the only investment that is guaranteed by the full faith and credit of the United States government is a Treasury bond.

Yet, it increasingly looks like the US is inching toward severely diluting the common equity of a set of banks where sovereign funds have substantial stakes,* if not wiping out the existing equity entirely. That potentially — as Larry Summers warned in a former life — is a foreign policy issue. Summers pondered this topic at last years Davos session on sovereign funds:

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Abu Dhabi’s tentative bailout of Dubai …

by Brad Setser Tuesday, February 24, 2009

The UAE’s central bank will apparently use $10 billion of its foreign exchange reserves to buy $10 billion of a (planned) $20 billion Dubai debt issue. That will provide Dubai with $10 billion in foreign exchange (Dubai gets the UAE’s dollar reserves in exchange for an IOU, the UAE gets a dollar-denominated claim on Dubai … ) to repay $10 billion of its external debt. Lex writes:

Dubai’s $10bn cash injection from the United Arab Emirates’ central bank has eased concerns about the struggling emirate’s ability to make good on $13bn in debt payments due by the end of this year. Just as important as the deal’s dollar figure, however, is the political message it sends. After weeks of uncertainty, Abu Dhabi, the Emirates’ oil-rich sugar daddy, has demonstrated its willingness to stand behind its poorer relation. … Strictly speaking, the UAE central bank’s purchase of $10bn of five-year Dubai bonds – part of $20bn in new bonds priced at 4 per cent interest – was agreed at the federal level. But at its core, the move amounts to a bail-out by proxy of Dubai by its wealthier neighbour, Abu Dhabi, which is the biggest contributor to the UAE’s federal budget thanks to a quirk of geography that left it holding 8 per cent of the world’s oil reserves.

I find it interesting that the financing for Dubai came from the Emirates (the confederation), not Adu Dhabi (the richest emirate). As Lex notes, it arguably is the same thing: Abu Dhabi’s oil ultimately backstops the federal government. But it nonetheless suggests:

a) Abu Dhabi – meaning the large investment funds of Abu Dhabi — itself may not be all that liquid. Abu Dhabi may be kind of like Harvard: very wealthy, but caught between ambitious plans to invest some of its resources at home (Harvard is planning a new science campus, Abu Dhabi is a lot wealthier and is planning a lot more … ), falling inflows, falling asset values and growing calls on its capital from various illiquid funds it has invested in.

B) Abu Dhabi doesn’t want to sell its existing foreign assets at distressed prices to finance Dubai. Tapping on the central banks existing liquid reserves is a way to avoid selling other assets …

Of course, financing Dubai through the central bank means that the quality of the assets on the Emirates central bank balance sheet will deteriorate. The central bank has traded $10 billion of liquid foreign assets for $10 billion of Dubai’s illiquid bonds. Dubaican notes that the coupon on the bonds looks well-below market, adding to their illiquidity. And, well, if other demands for liquidity materialize, Abu Dhabi could well have to meet them out of its own resources.

China’s record demand for Treasuries (and all US assets) in 2008

by Brad Setser Monday, February 23, 2009

This is Brad Setser once again. Thanks to both Rachel Ziemba and Paul Swartz for filling in for me last week. I rather enjoyed not having to write a post every day …

China has now released data on the PBoC’s other foreign assets (what I have called China’s hidden reserves) for December. The US TIC data for December is now out at as well. The two together permit us to paint a reasonably comprehensive picture of Chinese demand for US financial assets in 2008. This post updates the estimates of China’s true demand for US assets laid out in my paper with Arpana Pandey.* It consequently touches on the central subject of Geoff Dyer’s FT analysis piece, namely the scale of China’s holdings of US assets and China’s willingness to continue to add to its US portfolio.

Let’s start with China’s foreign portfolio. The PBoC’s other foreign assets didn’t fall in December. This means that the state banks’ required RMB reserves were reduced when the PBoC cut the reserve requirement then, not their required dollar reserves. It consequently is nearly certain that China has around $2.2 trillion in reserve-like assets — the $1.95 trillion in formal reserves, another $180b in “other foreign assets” (the foreign exchange the state banks have on deposit with the PBoC to meet a portion of their reserve requirement) and roughly $90b at the CIC (this excludes the funds the CIC has injected into state banks). The first three lines of the following graph consequently are pretty certain. The fourth line — which tries to estimate the foreign exchange held by the state banks — less so. I estimate that the state banks have around $200 billion in foreign assets, which brings the total foreign assets of China’s government to around $2.4 trillion. But I would be the first to concede that my estimate for the state banks’ foreign holdings is a more or less a true estimate — not a number that can be dug out of Chinese data if you know where to look.

There is no doubt that substantial sums of foreign exchange were shifted to the state banks through the use of swaps (in 06) and various recapitalization schemes (BoC and CCB in 2003, ICBC in 2005, CDB in 2007 and now ABC). There also is little doubt that the state banks are increasingly using that pool of funds to finance Chinese state firms “going forth” rather than to buy US bonds. The state banks almost certainly got burned on the US bonds that they bought in 2006. The only real question is the scale of their remaining holdings, and what the state banks have done with the funds that are no longer invested in foreign securities. My estimates for the state banks’ foreign portfolio is based on data the PBoC releases on the state banks foreign currency balance sheet, but I am not fully confident that my methodology really works.

On one point though there should be no doubt: China’s government is no longer adding to its foreign assets at quite the pace it once was. Something clearly changed in q4 2008. The growth in China’s foreign assets slowed even as China’s trade and current account soared. The most likely explanation is a rise in speculative capital outflows.

The slowdown in the growth in China’s foreign assets hasn’t yet translated into a slowdown in growth in China’s (estimated) US portfolio.

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How Are GCC (and Other) Sovereign Funds Faring? An Update

by rziemba Saturday, February 21, 2009

This post is by Rachel Ziemba of RGE Monitor where this post first appeared. Thanks to Brad for letting me fill in.

Recently,  Reuters reported that the assets under management of Kuwait’s sovereign wealth fund fell to 49b Kuwait Dinar ($177.6 billion) at the end of December from 58 billion Kuwait Dinar ($218 billion) in March 2008. – a face value decline of about $31 billion. Given that Kuwait had record oil revenues in 2008 (and a record fiscal surplus even if revenues tailed off in the second half) and KIA likely received record new capital, this implies that investment losses were even larger. It is significant for two reasons. One it shows that the estimates of fund performance (including those released in a recent paper by Brad Setser and myself) are on track and two, it could suggest that within limits there may be increasing amounts of transparency among sovereign investors. It also will provide an interesting test case of how the population and opposition react to the losses on the national wealth. Read more »

China’s Resource Buys

by rziemba Friday, February 20, 2009

Note: This post is by Rachel Ziemba of RGE Monitor (where this first appeared) thanks again to Brad for letting me fill in while he’s on vacation.

note: I’ve made a slight update to the discussion on the price Russia will pay for its loan.

China development bank must be busy…. Over the last few weeks, loans worth over $50 billion have been confirmed with the oil companies of Russia, Brazil and the Australian mining company Rio Tinto, all of which have found themselves with financing issues in light of the collapse in commodity prices and credit crunch. While $50 billion is a relatively small in terms of China’s foreign exchange liquidity, this is a significant investment on China’s part in the resource sector, and shows that it is trying to get higher returns on its capital – while coming to the rescue of those who cannot tap the still relatively frozen international capital markets. And given some of the dire predictions for energy sector investment (including warnings from the IEA) might avoid a severe drop off in investment, allowing some of these countries and China to get more bang for the buck as global deflationary trends lower costs.  Most significantly, it increases the share of oil supplies that are pre-contracted, perhaps a desire from both China and its suppliers to have a somewhat more predictable price environment for at least some of its supplies. And given the financing needs, China may be able to push for lower prices. Read more »

Revival of Credit?

by Wednesday, February 18, 2009

Note: This is a guest post by Paul Swartz. Again, I appreciate Brad giving me the opportunity to fill in while he is on vacation.


A recent congressional hearing focused on where the money from the first part of the TARP went. Some representatives chose to communicate the challenges that their constituents faced in were having getting credit and inquire whether the banks were extending credit. As shown on the Center for Geoeconomics Studies homepage, banks were contracting home mortgage credit in the third quarter. Given that the first TARP funds were distributed in late October (well into the fourth quarter) the latest Flow of Funds data leaves us to wonder whether the banks are extending credit after the first step of recapitalization or not.


The Federal Reserve’s G19 Consumer Credit Report provides a credit picture on a timelier (monthly) basis. On a year over year basis consumer credit is growing.  Banks are carrying this segment, making up for the securitization sector’s credit contraction (note: government lending plays a trivial role in this sector). It is interesting to note that, up until now, securitization has been more consistent (i.e. it has not been the cause of total growth volatility) than the banks (look at 81 and 90).

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Mortgage credit and the housing boom

by Wednesday, February 18, 2009

Note: This is a guest post by Paul Swartz. I appreciate Brad giving me the opportunity to fill in while he is on vacation.

Last Tuesday Timothy Geithner argued that a working economy requires a functioning banking system. This connection is conceptually clear to most people. If you can’t get a loan to go to school, buy a car or house or some consumer good, you are likely to delay or go without the consumption or investment.  Forgone spending meaning forgone income for someone else.  

If tight credit is a part of the problem now, easy access to credit was a key source of the getting us where we are today. Consider the following graph – based on the Fed’s Flow of Funds. It shows a tight correlation between the growth in home mortgage credit and the appreciation in the housing market (for the more technically minded, the quarterly correlation since 1980 is over 60%).

Correlation is not causation but it makes sense that easy access to credit would contribute to a rise in home prices and that a lack of credit could facilitate a housing collapse.

A valid question about this story is ‘did mortgage home prices appreciation increase credit or did credit increase home prices?’ Likely a bit of both; as home price appreciation accelerated more people had the capacity to use their home as an ATM and take out a home equity loan. Cash-out refinances average 37.2 Billion between 1991 and 2000 and 152.7 Billion between 2001and 2005. A similar question can be asked on the downside. Namely did falling home prices – through its impact on the banking system – lead to a tightening of credit, or was a tightening of credit a cause of the home price depreciation.

The Fed flow of funds data allows for a decomposition of the sources of mortgage credit. What stands out is the growth of “private label” mortgage securitization from 2002 through 2006 – and the subsequent collapse of the private securization market. The agencies (Fannie, Freddie) initially offset some of the contraction in demand for mortgages from private issuers. They have not – in large part due the high level of credit extension – been able to maintain positive aggregate home mortgage credit growth. To be fair they were pseudo private companies so it is not clear that they should have taken on a moderator role at all; in fact if they were simply trying to preserve their own existence they should have contracted credit not expanded it. It is interesting to compare the agencies moderating role in 1990.  At that time they offset the contraction in bank lending and home mortgage credit continued to growth. [See a combined graphic on the CGS home page].

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