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China reduced its dollar holdings in February

by Brad Setser
April 15, 2009

It is a good thing the US trade deficit has come down, because foreign demand for US financial assets — actually foreign demand for US assets other than short-term Treasury bills — has dried up.

Foreign investors bought $68 billion of T-bills in February. Russia alone (likely Russia’s central bank) bought close to $14 billion. Private investors — seemingly Japanese private investors — also bought $23.5b of longer-term Treasury notes. Otherwise, though, foreign investors didn’t buy much of anything. And Americans also didn’t buy many foreign assets.*

After Keith Bradsher’s New York Times article, though, all eyes are on China.

In February, China bought Treasuries. $4.64b by my count. It bought $5.61b of bills, while reducing its long-term Treasury holdings by $0.96 billion.

But China also reduced its US bank deposits by $17.24 billion.

Consequently, by my count, China’s total US holdings fell by $13 billion. Short-term claims fell by $11.3b, and long-term claims fell by $2b. The data on China’s short-term claims can be found here.

Is this the beginning of the end? Has China decided to stop buying US assets?

In my view, no.

China’s trade surplus was particularly low in February (largely for seasonal reasons), so less money was coming in. And if January’s purchases are added to February’s sales, China’s US holdings are still up — though only by $7-$8 billion.

More importantly, one month does not a trend make.

Over the past several months, China clearly has been shifting out of Agencies toward Treasuries — and buying fewer “risky” US assets of all kinds. It also clearly has been shifting its Treasury portfolio toward short-term bills.

But until February, China’s recorded dollar purchases, best I could tell, exceeded the growth in China’s reserves. China’s flows into “safe” US assets certainly exceeded its reserve growth.

I didn’t want to say that China was shifting into the dollar in November and December,** and I similarly don’t want to say that China is shifting out of the dollar now.

What is clear is that the slowdown in China’s reserve growth has started to translate — as expected — into a slowdown in China’s direct purchases of US assets.

Over the last three months, for the first time in a long time, the Setser/ Pandey data set — which includes an estimate of Chinese purchases through London — didn’t show any rise in China’s foreign assets.***

China’s estimated US portfolio has been hovering between $1520 and $1540 billion since November.

If China’s reserve growth picks up and China’s US holdings don’t that would be a real change. But for now, the story seems to be that the slowdown in China’s reserve growth has translated into a slowdown in its US purchases.

* The big swing in total TIC flows comes from the line item showing the net change in banks own dollar-denominated liabilities. I don’t have a full explanation for the large outflows in January and February (a combined $250b or so). They seem to be the counterpart though to the $635b in inflows from this line item last fall (from September to December). If I had to guess, I would bet both the inflow in the fall and the current outflow are linked to the Fed’s swap lines with foreign central banks — and the associated rise in European central banks dollar loans to European commercial banks. The rise in the fall corresponds with the expansion of the Fed’s swap lines in the fall, as the world’s central banks cooperated to provide a “global” dollar lender of last resort. And the recent outflow seems to correspond with the repayment of the Fed’s swap lines. Just a guess though. Confirmation would be appreciated.
** Some of the inflow into US assets could have come as China shed offshore dollar assets, or as China pulled dollars from private intermediaries.
*** China’s equity holdings have not been marked to market; the chart consequently overstates the current market value of China’s US equity holdings. I haven’t adjusted China’s equity portfolio because I suspect SAFE holds its equities on its books at their purchase price — i.e. it also doesn’t mark to market. Plus the spreadsheet was designed for bonds and I haven’t added a mark to market function!

37 Comments

  • Posted by Jian Feng

    Brad,

    The behavior of China vis-a-vis US now is difficult to predict, although we all like to guess. You have refrained yourself from making any predictions. Would you be interested in analyzing old data about the Great Depression in 1929? Did US borrow a lot of money then? If not, who borrowed and who lent, and what happened to them? Although history does not repeat itself, it does offer some basis for looking at the future. If such an analysis already exists, please tell us the source.

    Thanks

  • Posted by bsetser

    Jian — the US was a lender going into the Great Depression, especially to Germany. And when wall street crashed, private US investors stopped buying german debt — adding to the financial and economic pressures on Germany. The current situation doesn’t quite seem analogous.

  • Posted by M Krause

    To me, it appears as long as China is willing to trade and take dollars, they will buy treasuries with those dollars. The most likely alternative is that they take dollars just to sell them (which means a strong yuan and thus less dollars for them to receive in the first place).

    Considering February was a month where the US 30 year treaded water, and there was no net foreign buying, that actually bodes well for the interest rate horizon. When the economy recovers (and much of our US stimulus gets recycled into consumer spending), the trade deficits return and China’s treasury buying goes back up.

    I think we’re in a world with only a few possible outcomes – either the global economy recovers and China resumes its accumulation of US debt, alternatively China lets the yuan float and loses its export advantage (a gamble for China on its consumer), thus repatriating those reserves back to the US (stimulating our export economy and increasing US savers’ treasury buying capacity), or lastly continued economic malaise and likewise US treasury hoarding.

    Even the worst case in the eyes of many, where China sells treasuries and dumps its dollar assets to purchase other currencies and “things,” is largely stimulative for the US export sector and the real economy. Something that moves the AA curve out.

  • Posted by Off the boil

    “Russia’s central bank, bought $68 billion of T-bills in February. ”

    Any specific reasons behind such a big purchase ? Arent russians down in the dumps with Oil Slump ?

  • Posted by bsetser

    foreign investors bought $68b. central banks bought $34b of t-bills. russia bought close to $14b.

    why — it wanted the most liquid, safe portfolio around, and has been shifting like mad out of agencies. After the big fall in reserves since August, Russia isn’t taking any chances.

    the Gulf oil exporters, i should add, reduced their US short-term holdings for the second month in a row so there is no doubt that most oil exporters are hurting.

  • Posted by Glen M

    Perhaps a stupid question but what is to stop the US from issuing only long term TBs? Especially if engaged in quantitative easing.

  • Posted by bsetser

    t-bills are by definition short-term instruments, with a maturity of less than a year. but the us certainly could cut its sales of s-term bills and increase its sales of longer-dated coupon paying notes (bonds with a maturity of between 1 and 10 years) or even its sales of the long bond (30 y bonds). the risk is more sales of longer-term instruments would drive yields up.

  • Posted by fatbrick

    I am particularly interested in Feb and Mar TIC data since Treasury dramatically increased supply in the past two months. It seemed that China resumed to buy T-bonds/T-bills in Mar according to the NYT article. It is interesting to see how much of the money is rollover or new money. Do you have any data on this?

  • Posted by DJC.

    China and other Foreign Central Banks reducing their holdings of US Treasury bonds is a vote of “No Confidence” in Geithner’s “ridiculous economic ideas”. The Federal Reserve is printing an absolutely insane amount of dollars with the base M-1 money supply inflating by the trillions. Bernanke seems to believe that US Dollar hegemony permits the Federal Reserve to print an unlimited quantity of US Dollars without any consequences.

    The Washington Consensus elites are driven by a kleptocratic need to satisfy their own disires for wealth and power. Their game is not over until they have taken all the marbles. They are psychopaths, who could care less about trail of dead bodies they leave. Indonesia’s economy was raped and pillaged during the 1990′s Asian Economic Crisis by the same members of the Obama cabinet (ie. Robert Rubin, Larry Summers, Tim Geithner). While politically-connected Hedge Funds raped an estimated $10 billion in blood profits, an estimated 15,000 ethnic Chinese-Indonesians were massacred in a holocaust by CIA trained paramilitary forces in an Western effort to eliminate ethnic-Chinese geo-political influence across Southeast Asia.

    Geithner has no “ridiculous idea”. Geithner has no ideas at all. He is an order taker. He is a hired hand. From 1985-88 he worked for Kissinger. From 1999 to 2001 he worked for Rubin (and Summers, who also worked for Rubin). In 2002 he joined the Council on Foreign Relations as a Senior Fellow in the International Economics department until 2003. In late 2003 he became the President of the Federal Reserve Bank of New York, where he worked for Citi, Goldman Sachs and JP Morgan. Rather than regulate them, as was his job description, he allowed them to make their banks insolvent while they skimmed hundreds of billions of dollars right off the top. This year he became Secretary of the Treasury, where he works, once again, for Citi, Goldman Sachs and JP Morgan. Geithner is not self-driven. He carries out his duties without question. He does what he was hired to do. He does not have an original idea in his head.

  • Posted by Glen M

    I don’t think that it would be to bad to have yields go up if the yields are payable to US holders (replacing foreign purchases). Plus the US would benefit from the multiplier effect. I don’t think that it would be to difficult to swallow higher interest rates when compared to the alternatives. Besides it might even lower the spreads.

    BTW today’s currency report via the Exchange Rates and International Economic Policy Coordination Act of 1988, will be interesting to say the least.

  • Posted by Florin

    Brad,

    I am not an economist and I cannot tell what Jian meant, but from what I read in the smart blogs (such as yours), the comparison to be made is by substituting Great Britain during GD1 with USA now and USA during GD1 with China now

    Florin

  • Posted by charlie

    Brad,
    If you want to know what China’s long term plans are, you shouldn’t look at how many TBills or other US debt they’re buying. Rather, you need to look at their exchange rate. As long as their exchange rate relative to USD is stable, they haven’t changed their USD strategy. They only buy as much debt as they need to in order to maintain a stable exchange rate.

    If you see a rapid rise in RMB relative to USD, then you need to worry about a change in plan.

    As far as chinese central bank investing goes…
    If you want to know what was a good investment 6 months ago, look at what they’re buying now.

  • Posted by jonathan

    Thanks. The graphs continue to be striking. I wonder how much of the extraordinary build-up of treasuries and agencies was yuan valuation related versus “got nowhere else to put it” – those are, in many ways, 2 sides of the same coin because, except for their late increased allocation to equities (oops) they were kind of stuffing the money under the mattress.

    I can’t verify your note about the swap lines and the TIC, but it certainly makes sense given the current level of credit indicators. We stuffed that much into the ECB and now the system is awash in dollars.

    If you were in China’s shoes, how would you manage the coming challenge of the dollar’s valuation as the Fed unwinds its great adventure? Are they thinking they would take the hit to ride if they can ride the valuation down for their export engine? Do you think they could do that? (I have my doubts.)

  • Posted by bsetser

    If I were in China’s shoes, i would allow the RMB to start to appreciate against the dollar the moment export growth turns up …. and thus force myself to rely on domestic demand to pull out of the slump. I also would start giving speeches to the domestic Chinese audience noting that China invested a ton of money abroad and likely will take losses on those investments, as China was buying assets not for a return but to keep the chinese exchange exchange rate down and thus to help China’s exporters. China needs to level with its own population about the costs of the policies that produced the recent boom — not sweep those costs under the rug. So do a lot of other governments, including the US government (let’s see what happens with the budget and the stress test and the costs of the bank bailout).

    Charlie — i generally agree but there is chance china might adjust its portfolio before it adjusts its peg. that said, if it sold USD w/o changing its peg, a host of countries would be upset, as China would seem to be intentionally using its reserve management policies to push the RMB down and thus gain a competitive edge.

    DJC — the fall in central bank demand has everything to do with the fall in global reserve growth and nothing to do with US policy. central bank demand for treasuries continues to track far higher than global reserve growth, indicating that central banks are shifting funds into the Treasuriy market even as their reserves fall. russia is a case in point. If reserve were growing and central banks weren’t buying i would change my tune …

  • Posted by gillies

    i may be out of step here, but i see the big change as being in the willingness to lend, and to borrow. leverage had been pushed to absurd and unsustainable levels, and must now return towards some kind of long term mean.

    in a ‘floop’ – my shorthand for a (positive or negative) feedback loop – there is no advantage in regarding any one part of the circuit as the ’cause’.

    china’s willingness to buy treasuries and the united states’ willingness to run deficits by borrowing back this money – using it, in part, to buy more imports – can be seen as one and the same process.

    we are now surely in a negative floop, a self decelerating process whereby less loans are made, more is saved, less is imported, the deficits decline, chinese reserve accumulation contracts, and demand for treasuries is less.

    the same is going on with the famous 1970s kissinger/o p e c unwritten agreements over recirculating oil money.

    if they (o p e c) have less – however they decide to reinvest it, they will be reinvesting less.

    gold worshippers perhaps tend to see paper and pixel money as a commodity, so do some inflation obsessives, but it is the circulation of money, the number of transactions, which matters, as well as the quantity.

    plain people in kansas or alabama or ireland or iceland sit around the kitchen table and talk over how to live more frugally this month.

    they are coming up with answers.

    (they are not trading in the car this year, is one answer.)

    without attempting to trace the chains of contraction, that is eventually going to affect the amount of dollars flowing abroad, and thus all of the things those dollars recirculate into.

    peering into the dark recesses of the chinese mind is fascinating – but we could equally well be checking out people closer to home in broad daylight. walk down your own main street – count the vacant shops to let. . .

    in a globalised interconnected world, you could nearly plot and predict chinese purchases of treasuries, off that ?

  • Posted by DJC.

    U.S. Struggles to Adapt to China’s Economic Strategy

    http://www.worldpoliticsreview.com/article.aspx?id=3614

    The tiny desert town of Abeche, in eastern Chad, offers a curious sight: Sandwiched between the mud huts that most people call home and the compounds belonging to international aid workers is a humble Chinese restaurant catering to Chad’s growing population of Chinese engineers and managers. Significantly, no equivalent American-style restaurant is to be found.

    The same holds true across the resource-rich, institution-poor developing world, in countries as remote as East Timor and as dangerous as Somalia. While much of the military establishment in Washington continues to plan for a possible conventional war with China, Beijing is studiously avoiding a direct confrontation, instead expanding its influence through means other than traditional warfare. Principal among them is the deployment of Chinese technocrats abroad on profit-seeking missions for the world’s third-largest economy.

    A series of events in Washington in March and April highlighted the ways in which the U.S. is struggling to come to terms with a rising China, whose greatest strength — even during a global recession — is not military, but rather economic in nature.

    Instead of challenging U.S. military dominance, Beijing has long focused on forging economic ties. “China’s investment in Africa is rising sharply, and Beijing boasts a proactive record on aid and debt relief, having given more than $5.5 billion in assistance and canceled the debt of 31 countries,” Japanese Africa analyst Hisane Masaki wrote this month in the trade journal Japan Focus. Meanwhile, the growth rate for Chinese investment in Africa has far exceeded the growth rate for U.S. investment, leaving the two countries’ two-way trade in Africa roughly equal today, despite the U.S. having a much larger economy.

    Furthermore, old-fashioned firepower is still favored over economic measures as a means of advancing U.S. interests by the individual military services, powerful industrial lobbies and many members of Congress.

    As long as that is the case, China will continue to outmaneuver the U.S. on the global economic battlefield.

  • Posted by Twofish

    bsetser: I also would start giving speeches to the domestic Chinese audience noting that China invested a ton of money abroad and likely will take losses on those investments.

    It’s all relative. One can argue that if you have near zero inflation in the US then any appreciation in the RMB is a gain in Chinese liabilities rather than a loss in US investment.

    It’s far from clear that if you look over time horizons of a decade, that the $2 trillion in foreign exchange will result in a loss in value.

    bsetser: China needs to level with its own population about the costs of the policies that produced the recent boom — not sweep those costs under the rug.

    Part of the job of a politician is precisely to create visible social benefits while sweeping costs under the rug. As long as you are keeping track of what is under the rug and as long as the rug is big enough, I don’t see anything wrong with this.

    You run into problems only when you stop keeping track of how much you swept under the rug and how big the rug is.

    People don’t care how the sausage is made. They care about jobs and prosperity, and are willing to go along with any politician that will give it to them.

    The thing that you must remember about money is that money is a mass collective hallucination. I give someone some green pieces of paper, and they give me *food*. That’s nutty if you really think about it.

    It only works between people have this collective illusion that those green sheets of paper have any value at all. Finance exists only to maintain this collective hallucination, and like all ghosts and hallucinations, you run into problems only when you think that there is something there that is real, when there isn’t.

  • Posted by Twofish

    DJC: Instead of challenging U.S. military dominance, Beijing has long focused on forging economic ties. “China’s investment in Africa is rising sharply, and Beijing boasts a proactive record on aid and debt relief, having given more than $5.5 billion in assistance and canceled the debt of 31 countries,”

    Those numbers are pre-crisis, and they are likely to drop sharply. With commodity prices low, China really doesn’t have that much reason to go into Africa, and right now it’s not clear how Africa investments will help China. Also $5 billion is miniscule.

    DJC: Beijing is studiously avoiding a direct confrontation, instead expanding its influence through means other than traditional warfare. Principal among them is the deployment of Chinese technocrats abroad on profit-seeking missions for the world’s third-largest economy.

    I think this *vastly* mischaracterizes Chinese intentions. China has no interest in playing geopolitical games or increasing “influence” except when there is a clear benefit to the domestic Chinese economy. Sometimes “increasing influence” and “self-interest” coincide, but often they don’t.

    Also, I think it is a huge, huge mistake for Africans to look to China as some sort of benefactor. There is absolutely no reason why Africans should expect better treatment from China than from the United States, and it is absolutely essential that Africa focus on self-reliance as the main means of growing their economy.

    China (and the US and Europe) are interested in Africa for China’s sake, and if Africans don’t play hard at the negotiating table, they are going to be horribly exploited by foreign powers including China. Sometimes you do have to beg, and if you have to beg, then beg. But don’t be under any illusions about what is going on.

  • Posted by Twofish

    DJC: Bernanke seems to believe that US Dollar hegemony permits the Federal Reserve to print an unlimited quantity of US Dollars without any consequences.

    Personally, I think he is going to be proven right.

    DJC: The Washington Consensus elites are driven by a kleptocratic need to satisfy their own disires for wealth and power.

    Which basically makes them pretty much the same as the leadership of any other nation or major corporation. You are simply not going to be President of the United States or President of China or CEO of a Fortune 500 company unless you have an intense selfish desire for wealth and power. Unless you are borderline crazy you are going to be stomped on in the quest for power by someone who is.

  • Posted by gillies

    “china is not a currency manipulator.”

    mr geithner says so. so they have reached some kind of understanding for the moment – at or around the time of the g20 meeting. we may not know what it is, but you can hear a deal being done, even at this distance.

    “I give someone some green pieces of paper, and they give me *food*. That’s nutty if you really think about it.”

    no, twofish. money is not a commodity but a measure. that measure requires an element of mutual trust. i personally have a cheque book but not a bank guarantee card. i can get money only locally or where there is personal trust.

    ultimately dollars work on the same requirement.

  • Posted by Twofish

    The term “China is buying” implies that someone in the Chinese government is making all of the decisions about what to do, and they are just one actor.

    In particular the reduction of net Chinese purchases is impacted by lots of money leaving China for the West. It is true that SAFE determines how much to balance this flow, but you still could have a situation in which the Chinese government is buying massive amounts of Treasuries, but these are being balanced by large amounts of sales as people exchange RMB for dollars. Buying $25 billion and selling $30 billion isn’t quite the same thing as just selling $5 billion.

    Glen M: Perhaps a stupid question but what is to stop the US from issuing only long term TBs? Especially if engaged in quantitative easing.

    It would cause total chaos in the financial markets, which is the last thing that people want right now. If Treasury stops issuing short term treasury bills, then short term interest rates will spike, which is the last thing that people want to happen right now.

    Also it is *extremely* unwise to assume that the US dollar will depreciate even with the massive amount of money that is being printed. People have lost massive amounts of money making that bet over the last century. Financial systems are extremely complex, and strange and bizarre things do happen especially with currency exchange rates.

    It’s also not a good idea to assume that just because someone has losses that they made a bad decision. For example, if the People’s Bank of China loses $200 billion in reserve losses, this could be a very good decision, if all of the other options cause it to lose $500 billion or more.

    The heavy focus on exports of light manufacturing has come under extreme criticism in China over the last three years, but curiously the main complaints I’ve heard are not related to foreign exchange reserves.

    The main complaint is that when China exports an Iphone, it makes maybe a very small fraction of the cost of the phone, and the majority of the wealth generated by selling the Iphone gets sent to the US.

    Another point was the export growth was probably going to hit a wall even if it wasn’t for the financial crisis. Something that was pointed out to me is that you had massive closings of light manufacturing plants in southern China before the financial crisis hit.

  • Posted by don

    “It is a good thing the US trade deficit has come down, because foreign demand for US financial assets — actually foreign demand for US assets other than short-term Treasury bills — has dried up.”
    Or, as I prefer to think of it, the trade deficit has come down, because foreign demand for U.S. financial assets has dried up. Since the two must match as part of the BoP identity (excepting typically minor adjustments in income flows on existing investment), there is no fortunate coincidence involved.

  • Posted by don

    “If I were in China’s shoes, …”
    I think this is truly excellent advice which, if taken, could substantially reduce trade tensions, especially compared to the path I fully expect China to follow (building up substantially more reserves).

  • Posted by don

    “Also it is *extremely* unwise to assume that the US dollar will depreciate even with the massive amount of money that is being printed.”
    Particularly as it is only massive amounts of bank reserves that have been created, and the money supply has not yet followed suit (instead, banks are holding massive excess reserves).

  • Posted by locococo

    I would also advise on not giving speeches to the domestic audience that we invested a ton of money for a return but somehow mixed up assets with liabilities in the process but but will now ignore the velocity residual in equation pointing straight through to barter.

  • Posted by jonathan

    I’d say that if this “downturn” becomes a depression, then China will work to develop its internal market more and will work in a variety of ways to align its neighbors currencies with theirs so the yuan can appreciate, etc. If things turn, I’ll bet they do the easy not the right thing and stoke the export engine while keeping the yuan down.

    You must have seen those huge shopping malls over there. They expect rising internal demand at some time or they wouldn’t build those things.

  • Posted by Twofish

    jonathan: If things turn, I’ll bet they do the easy not the right thing and stoke the export engine while keeping the yuan down.

    Don’t think so. The government was trying to get out of the low cost export model to begin with, and the crisis just accelerated the schedule. Also, even if things get back to “normal” you are just going to have exports to back to where they were before. It’s implausible that you’ll have double digit growth.

    Most of the gold has been dug out of the mine.

    jonathan: You must have seen those huge shopping malls over there. They expect rising internal demand at some time or they wouldn’t build those things.

    That assumes a rational financial system which is often not a good assumption.

    When you do construction, a lot of people get paid up front, and the fact that the thing that is constructed is useless may not matter.

    You also run into the problem in which one person correctly thinks that they will make a ton of money if they build a shopping mall, and they will, if they are the only shopping mall that gets built. If you have huge numbers of people building shopping malls at the same time, then you got a really big problem.

  • Posted by real

    TwoFish-

    what are your thoughts on the rally? China is reducing dollar holdings and the baltic dry index clearly looks bad in my eyes. this would signal global exports are continuing a decline. This was also evident as consumer prices are in deflation.

    it’s not adding up to me. when will official stress tests be released? how about May 11th, 2009?

  • Posted by Twofish

    real: what are your thoughts on the rally?

    Personally, I think that we have hit bottom, and that things are improving. The big danger right now I think is the danger of “catastrophic success.” As far as I can tell, no one is thinking deeply about what happens if everything goes according to plan.

    Suppose, everything works according to plan, and we are out of the recession in a few months? Now what?

    It’s just what happened when US troops entered Baghdad and defeated the Taliban, or when China succeeded in reforming the SOE’s or when Greenspan pulled the US out of the 2001-2002 recession. No one thought about what happened if there was total success, which caused big, big problems down the road.

    real: China is reducing dollar holdings and the baltic dry index clearly looks bad in my eyes.

    I don’t think so. The Chinese government had been planning to get out of the low-end export business for a few years now, and the crisis is forcing them to do in five months what they had been planning to do over five years.

    What I think is basically happening is that the Chinese government is cashing in dollars for RMB which it is using to finance internal construction which then provide jobs for the tens of millions of peasants that are now out of work from exports.

    real: this would signal global exports are continuing a decline. This was also evident as consumer prices are in deflation.

    Which may not be such a bad thing. The economic system as it existed in late-2007 is gone. Finished. The end. What people are groping for is what the new economic system is going to look like.

  • Posted by jonathan

    Twofish, China has been switching from low to high end, from simple to complex, to assembly and high-tech. Your response to my comment indicates they rely more than they do on bulk. They have a fairly clear strategy in moving into upscale goods; using their vast human resources and ability to direct capital, they have pushed into more areas than a smaller country could. You should see the looms they have, things that can outweave Missoni for a tiny fraction of the cost. They realize they have the resources to do more than fill a niche the way Germany does with tools – and they’re currently sucking German knowledge out of their imports of advanced tools.

  • Posted by jonathan

    Twofish, btw, forgot to mention above that I’m aware of your knowledge of China.

    As for malls, forgot to mention that the system in the US would not qualify as rational either. It’s driven by anchor commitments because those generate loan commitments. The system is not driven by market need but by such vagaries as takeovers in the department store industry and expansion of chains into new markets. I’ve been in retail development and the system here has generated radical over-supply, even to catastrophic levels in many markets. A key difference is that in China they have people, are underserved by retail according to essentially every measure, and are betting – sensibly – on income growth in their population, while in the US developers have been betting on population movement (since growth here is mostly migration plus household formation) they hope may materialize because they have no other development opportunities in this over-built nation. Large malls – the hundreds now in China – are in real ways comparable to cell phones in developing nations; they skip the old forms and go right to the newer.

  • Posted by WStroupe

    I think the net decrease in China’s dollar holdings for February is significantly more important than Brad is stating here, for the simple reason that China is already making meaningful moves to convert a portion of its dollar holdings into holdings of hard assets. That fact, along with the fact that it is only buying mostly short-term Treasuries, tells me that China is already embarking upon a strategic shift in its direction with respect to the dollar.

    See this Telegraph article by Ambrose Evans-Pritchard: http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/5160120/A-Copper-Standard-for-the-worlds-currency-system.html

    Brad evidently assumes that no such meaningful strategic shift would be signaled unless it became the case that China’s reserves began to increase again, while at the same time it did not make net purchases of dollar assets. And he evidently further assumes that if and when China’s reserves do begin growing again, then it’s purchases of dollar assets will pick up also. I think that’s a quite unsafe prediction, or assumption. I further think that China’s leaders are making a strategic shift now, not waiting until their reserves begin growing again. By the multiple statements by its leaders recently, I think China has concluded that it cannot afford to take a wait-and-see attitude toward the dollar and its Bretton-Woods II agreement with the U.S., to see if such matters will get back on track – they evidently have serious doubts Bretton-Woods II has much of a future.

    By its multiplicity of currency swap agreements, China is stimulating bi-lateral trade with partners across the globe, thus implementing a strategy aimed at replacing its inordinate reliance upon the U.S. market and U.S. dollar. By its domestic stimulus packages, it is implementing a strategy aimed at spurring domestic consumption. And by its ongoing conversion of dollar reserves into strategic resources reserves, it is implementing a strategy aimed at reducing its dollar exposure to safer levels.

    So, taken as a coherent picture, I think China’s making a multi-pronged strategic shift away from the U.S. and the dollar. Brad, I think your assessment is too timid here.

    And as Twofish pointed out in the past, these ‘resource buys’ deals by China also afford it greater visibility into advanced technologies and expertise with respect to strategic resources. Also, the deals, which are multiplying across the globe, may well afford China an increased measure of access, control over supply and pricing, while the West may well emerge on the short end of the access to strategic resources, which will only further enhance China’s global leverage – hence China is getting a whole lot of bang for its buck. Down the road a bit, this is going to become much more evident.

  • Posted by Tono

    To introduce a related topic. I’ve recently come across research that postulates the money multiplier model is incorrect. Rather than M0 leading M1 and M2, two Fed economists have shown that M2 in fact leads the monetary base. This has profound implication, not lease of all for bernankes ability to fight inflation through increasing M0, so he will actually have to begin printing money, turn up the helicopter to avoid a massive debt crisis. Moreover, debt to base money should always be <1, turns out its more than 40!

    China reducing its dollar holds relates in the sense that QE undertaken by the Fed has supplanted their demand, and WILL continue to INCREASE, for USD assets. More on these two topics here:

    http://www.debtorsprisonblog.org/journal/2009/4/16/what-if-the-money-multiplier-model-doesnt-work.html

  • Posted by DOR

    M Krause: China’s export advantage isn’t mainly the exchange rate. There are a lot of other, much more important factors than that to consider.

    bsetser: Your advice on China appreciating the RMB vis-a-vis the dollar at the first sign of export growth, and relying on domestic demand to pull out of the slump doesn’t seem to take into account the main economic objective at the heart of Zhongnanhai’s worries: unemployment.
    Domestic demand is how China will crawl out of the NEXT major economic downturn, not this one.

  • Posted by bsetser

    DOR — care to explain why Chinese export growth to Europe picked up after 2002? seems hard to explain the acceleration without some reference to the EUR v th eCNY.

    Similarly, what accounts for the acceleration in chinese export growth from 02 on if not the RER depreciation brought about by dollar depreciation.

    95-02. CNY appreciates in real term. China doesn’t run big surpluses.

    02-06: CNY depreciates in real terms as productivity growth accelerates. China develops a large surplus.

    I am happy to be persuaded otherwise, but for now, I would argue that the evidence suggesting that the real value of the RMB has a major impact on the rate of export growth is quite strong …

    as for Zhongnanhai, i presume the engineers there have figured out that china’s exports can increase by a factor of 5 over the next 8 years (given their current size/ realistic growth in world amrkets). and I also figure the engineers there are smart enough to realize that China’s export boom didn’t actually produce a boom in employment, as there was too much substitution of capital for labor. Per unit of growth, CHina’s job creation was actually incredibly weak … and labor income fell as a share of GDP during the boom. If exporting was a jobs policy, it wasn’t one that was working …

  • Posted by DOR

    Brad,

    I’m not sure what surge in Chinese sales to Europe you’re referring to. EU-25 imports from China rose 26.2% p.a. in 2000-02 (euro terms), and 17.4% p.a. in 2003-07. (http://epp.eurostat.ec.europa.eu/portal/page?_pageid=1996,39140985&_dad=portal&_schema=PORTAL&screen=detailref&language=en&product=REF_TB_external_trade&root=REF_TB_external_trade/t_ext/t_externaltr/tet00018). Import of machinery and transport equipment from China (40-45% of all imports from China) rose 30.5% p.a. in 2000-02 and 15.8% p.a. in 2003-07.

    Utilized FDI averaged US$40-45 bn a year in 1996-2001, and $52-92 bn a year thereafter. That might have had some small effect on the export sector. The length of China’s highways increased 5.3% p.a. in the ten years prior to 2002, and 18.3% p.a. thereafter. Freight moved on the rails rose 2.7% p.a. in 1993-2002 and 8.9% p.a. since then.

    And, the kicker: in 1993-2002. global trade rose an average of 5.6% p.a., whereas in 2003-07 it rose 16.5% p.a. Personally, I don’t think that was entirely due to China’s exchange rate.

    As for the export boom not creating a job boom, I cannot believe the data are sufficiently accurate to lead to useful conclusions about the jobs per unit of export. What I can believe is the incredible explosion of growth, jobs and prosperity that my own eyes have witnessed, and that every single one of my contacts would verify.

  • Posted by RN

    Twofish wrote:

    “Also it is *extremely* unwise to assume that the US dollar will depreciate even with the massive amount of money that is being printed. People have lost massive amounts of money making that bet over the last century. Financial systems are extremely complex, and strange and bizarre things do happen especially with currency exchange rates.”

    Hmmmm…

    History does not equal future, and counting on “strange and bizarre things”?

    If this is the best you can do….think I’ll be increasing my dollar hedge. :)

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