Brad Setser

Follow the Money

Cross border flows, with a bit of macroeconomics

Posts by Category

Showing posts for "central bank reserves"

China Sold Reserves in June, Just Not Very Many

by Brad Setser

Both of the key proxies for China’s actual intervention in June are out.

The PBOC’s balances sheet shows a $15 billion dollar fall in reserves.

And the State Administration on Foreign Exchange (SAFE) data on foreign exchange settlement by the banking system (the PBOC is treated as part of the banks) shows $18 billion in sales from the banking system (using sales for clients, not net settlement).

They paint a consistent picture. The gap between the modest sales reported in the data and the rise in headline reserves ($13.4 billlion) is almost certainly from the mark-to-market gains on a portion of SAFE’s book. The portfolio of high quality bonds should have increased in value in June. Friends who read Chinese say SAFE has admitted as much on its website.

The more interesting thing to me is how modest the sales were, at least when compared to other periods of depreciation (against the dollar) in the last two years.

FX-Settlement-CNY-June

Either the carry trade unwind is over or the controls work. Or somehow this most recent depreciation hasn’t produced expectations for further depreciation, even though the crawl down against the basket has been pretty stable.

It is a puzzle, at least to me.

For the conspiratorially minded, the banks do look to have sold foreign exchange from their own accounts in June, as they did last August and this January. But the sales from their own account were modest—$5 billion versus $85 billion last August and $15 billion in January. And the settlement data for forwards also shows a modest reduction in the net forward book of the banks in June. Net of the change in forwards, total sales in the settlement data look to be just under $15 billion.

Read more »

How Many Reserves Does Turkey Need? Some Thoughts on the IMF’s Reserve Metric

by Brad Setser

Turkey has long ranked at the top of most lists of financially vulnerable emerging economies, at least lists based on conventional vulnerability measures. Thanks to its combination of a large current account deficit and modest foreign exchange reserves, Turkey has many of the vulnerabilities that gave rise to 1990s-style emerging market crises. Turkey’s external funding need—counting external debts that need to be rolled over—is about 25 percent of GDP, largely because Turkey’s banks have a sizable stock of short-term external debt.

At the same time, these vulnerabilities are not new. Turkey has long reminded us that underlying vulnerability doesn’t equal a crisis. For whatever reason, the short-term external debts of Turkey’s banks have tended to be rolled over during times of stress.*

And, fortunately, those vulnerabilities have even come down just a bit over the last year or so. After the taper tantrum, Turkey’s banks even have been able to term out some of their external funding by issuing bonds to a yield-starved world in 2014, and by shifting toward slightly longer-term cross-border bank lending in 2015 and 2016 (See figure 4 on pg. 35 of the IMF’s April 2016 Article IV Consultation with Turkey) And while the recent fall in Turkey’s tourism revenue doesn’t look good, Turkey also is a large oil and gas importer. Its external deficit looks significantly better now than it did when oil was above a hundred and Russian gas was more expensive.

external-borrowing-vs-fx-reserves

Turkey doesn’t have many obvious fiscal vulnerabilities; public debt is only about 30 percent of GDP. Its vulnerabilities come from the foreign currency borrowing of its banks and firms.

There is one more strange thing about Turkey. Its banks have increased their borrowing from abroad in foreign currency after the global financial crisis, but there hasn’t been comparable growth in domestic foreign currency lending. Rather, the rapid growth has come in lending in Turkish lira, especially to households.

Read more »

A Simple Explanation for the Rise in China’s Reserves in June?

by Brad Setser

There are plenty of possible explanations for the surprise jump in China’s headline reserves in June.

A high allocation to yen (up around 6.5 percent), for example, or a low allocation to pounds (down nearly 8 percent).

Headline reserves are reported in dollars, and thus change when dollar value of euros, pounds, yen, and other currencies held in a typical reserve portfolio change.

But, absent a much bigger allocation to yen than to pounds, it is hard to see how currency moves in June can explain the $13.5 billion increase in headline reserves. My simple valuation adjustment actually churns out a tiny valuation loss from currency moves, so it implies a slightly higher underlying pace of reserve accumulation than the rise in headline reserves.

However, some countries—following the IMF’s SDDS standard—also report the market value of their securities portfolio. And rises in the value of a portfolio that consists primarily of bonds could easily explain the rise in China’s June reserves.

A two-year Treasury should have increased in value by about half a point, and a five-year Treasury rose by almost two points. I get bond valuation gains of very roughly $15 to $20 billion on a stylized version of China’s U.S. Treasury portfolio,* and there should also be gains on China’s euro portfolio and other fixed income assets. 5 year bunds were up a bit under a point. Extrapolating a bit, across all currencies bond market gains could have added something like $25 billion to the value of a bond portfolio that likely tops $2.5 trillion by a significant margin (not all of China’s reserves are in bonds).

Of course, it is also possible China also might have started to buy dollars in the market. This though feels like a stretch — most observers suspect China’s central bank is still selling dollars through the state banks, at least in the offshore market in Hong Kong. China seems to have wanted to make sure the CNY’s depreciation against the dollar in June was orderly, and that the CNH moved in line with the CNY. This recent Reuters article, for example, hints that China still is selling foreign currency (“further weakness was capped as the central bank was suspected of intervention to offset massive dollar demand from banks’ clients, traders said”).

The uncertainty about the sign of China’s activity in the market makes the foreign exchange settlement and the PBOC balance sheet data that will be released toward the end of the month all the more important. The settlement data and the PBOC’s balance sheet data often provide a cleaner read on China’s actual intervention than the change in headline reserves.

[*] Ballpark math: if China held around $1.5 trillion in U.S. Treasuries (I added Agencies to my actual estimate and rounded a bit), with two-thirds at an average maturity of two years and one-third at an average maturity of 5 years (to fit with the data showing total returns on both maturity buckets) the mark to market gain on its Treasuries would be around $15 billion. If two-thirds were in five-year bonds and only a third in two-year bonds, that would be $20 billion. All this is very rough. Precise estimates here would stretch the technology a bit too far, given all the uncertainty about China’s reserve portfolio. Most Treasuries held in central bank reserves, according to the Treasury data, have a maturity of less than five years; see pp. 24-25 of this Treasury report.

More on China’s May Reserves

by Brad Setser

The best available indicators of China’s activity in the foreign exchange market—the People’s Bank of China’s (PBOC) balance sheet data, and the State Administration of Foreign Exchange’s (SAFE) foreign exchange settlement data—are out. They have confirmed that China did not sell much foreign currency in May.

RMB_new

The PBOC’s balance sheet data shows a fall of between zero and $8 billion (I prefer the broadest measure—foreign assets, to foreign reserves, and the broader measure is flat). And SAFE’s data on foreign exchange (FX) settlement shows only $10 billion in sales by banks on behalf of clients, and $12.5 billion in total sales—both numbers are the smallest since last June.

The settlement data that includes forwards even fewer sales, as the spot data included a lot of settled forwards.

A couple of weeks ago I noted that May would be an interesting month for the evolution of China’s reserves.

May is a month where the yuan depreciated against the dollar. The depreciation was broadly consistent with the basket peg. The dollar appreciated, so a true basket peg would imply that the yuan should depreciate against the dollar.

And in the past any depreciation against the dollar tended to produce expectations of a bigger move against the dollar, and led to intensified pressure and strong reserve sales.

That though doesn’t seem to have happened in May. All things China have stabilized.

Read more »

A Bit More on Chinese, Belgian and Saudi Custodial Holdings

by Brad Setser

Marc Chandler asked why I chose to attribute Belgium’s holdings to China rather than any of the other potential candidates—notably the Gulf and Russia.

The answer for Russia is pretty straightforward. Russia’s holdings of Treasuries (and in the past Russia’s holdings of both Treasuries and Agencies) tend to show up in the U.S. custodial data. Russia holds around $275 billion in securities in its reserves, and it holds a relatively low share of its reserves in dollars (40 percent still?). $85 billion in Treasuries (in March) is more or less in line with expectations. There are maybe a few billion missing, but there also is no need to search for large quantities of missing Russian dollar-denominated reserve assets.

Differentiating between the Gulf and China is a bit harder. Both are to a degree “missing” in the custodial data. Both China’s and the Gulf’s custodial holdings are a bit lower than would be expected based on the size of their reserves, and for the Gulf, the size of their reserves and sovereign fund. Both are big players, so both could conceivably account for one of the key features of Belgium: the rapid rise and then the rapid fall in Belgian’s custodial holdings.

So why China?

Consider a plot of Saudi Reserves—looking only at the Saudi Arabian Monetary Agency’s (SAMA) holdings of securities. I also plotted the change that would be expected if say 75 percent of SAMA’s securities were in dollars, just as a reminder that the full change is the upper limit. SAMA also has a lot of deposits, but they aren’t relevant here.

Saudi Arabia

It is fairly clear that the changes in Belgium’s custodial holdings are a loose fit at best for SAMA’s security holdings. The big run-up in the Belgian account actually came when the pace of Saudi reserve growth was slowing. And the drawdown in Saudi reserves started a bit before the drawdown in Belgium, and has been more steady.

Read more »

How Many Treasuries Does China Still Own?

by Brad Setser

Quick answer. A lot. Between $1.3 trillion and $1.4 trillion, or about 40 percent of China’s reserves. The last year has made it abundantly clear that Belgium’s holdings of Treasuries aren’t from Belgian dentists. China’s reserves started to fall last summer. Yet China’s reported holdings of Treasuries in the custodial data barely budged. Belgium’s holdings, by contrast, fell by around $200 billion. It is now standard among those who care about this stuff to add Belgium’s holdings (between $80 and $90 billion in long-term Treasuries, and $154 billion if you count Treasury bills) to those of China ($1245 billion).

A more interesting question, one that takes a bit more technical wizardry to report, is how many U.S. assets China holds. The right answer, I think, is at least $1.8 trillion and perhaps more. That is somewhat less than China used to hold—but still quite a lot. In addition to Treasuries, China has $200 billion or so in Agencies, and $200 billion or so in U.S. equities, and close to $100 billion on deposit in U.S. banks. That is more or less in line with expectations for a country with $3.2 trillion in reserves.

ONE

I actually lied about the technical wizardry required. Now that the Treasury reports monthly custodial holdings of all kinds of debt along with custodial holdings of U.S. equities, the amount of skill required isn’t very high. You just need to know where to look. (Historical data is here)

I do still have a few tricks up my sleeve. After all, the trick to Treasury International Capital (TIC) watching is looking at changes over time, and trying understanding the resulting patterns. The art comes in making the adjustments needed to make the custodial data better map to the transactional data.

If you want a continuous time series that goes back to the start of China’s reserve accumulation, you need to extrapolate between the annual custodial surveys from 2002 to 2012. Using, in broad terms, the methodology outlined here, that can be done with a fair amount of sweat, toil, and tears. After 2012, the Treasury provides a continuous monthly data series.

Read more »

China’s May Reserves

by Brad Setser

The change in China’s headline reserves is actually one of the least reliable indicators of China’s true intervention in the foreign currency market. Valuation changes create a lot of noise. And it is always possible for China to intervene in ways that do not show up in headline reserves. Last fall, for example, much of the intervention came from changes in the banks’ required foreign currency reserves.

The change in the foreign assets on the PBOC’s balance sheet, and the State Administration on Foreign Exchange’s (SAFE) foreign exchange settlement data are more useful.

Still, there is valuable information in today’s release. The roughly $30 billion fall in reserves to $3,192 billion (not a very big sum) is more or less explained by a $20 billion or so fall in the market value of China’s euros, yen, pounds, and other currency holdings. Actual sales appear to have remained low.

That is interesting and perhaps a bit surprising, as the yuan depreciated in May against the dollar. And in past months, yuan depreciation against the dollar has been associated with large sales of dollars, and strong pressure on the currency.

CNY v Basket

We need the full data on China—the “proxies” for true intervention that should be released over the next couple of weeks—to get a complete picture. But if it is confirmed that China’s reserve sales were indeed modest, I can think of three possible explanations:

1) Renewed enforcement of controls on the financial account are working. They limited outflows.
2) Chinese companies have mostly finished hedging their foreign currency debts. They now have had three quarters to pay it down, or to hedge. And it certainly seems from the balance of payments data in late 2015 that Chinese banks and firms were paying back their cross-border loans with some speed.
3) Managing against a basket (at least some of the time) is working. The depreciation against the dollar came in the context of the yuan’s appreciation against the basket, and thus did not generate expectations that the move against the dollar was the first step in a much bigger devaluation.

Read more »

What Drove China’s Large Reserve Sales?

by Brad Setser

China never was going to transition from one of the most heavily managed currencies in the world to a free float overnight. The critical question always has been how China is going to manage its currency, not whether China will manage its currency. The “market” in China has effectively been a bet on where the People’s Bank of China (PBOC)—and its various masters—wanted the currency to go. The reform last August did not change that.

And China made its task more difficult last August by trying to get rid of one of its tools for managing market expectations—the daily fix of the level for yuan against the dollar, which in theory, though rarely in practice, sets the yuan’s daily trading band—precisely when it moved to destabilize market expectations. Both the spot (the “market” price for China’s currency) and the fix (the PBOC’s reference rate) had been remarkably stable in the three to four months prior to China’s August currency reform. Depreciating the fix to the weaker spot price sent a signal, even if the actual initial move was rather small. In a different world, it would be interesting to game out what might have happened had China guided the spot up toward the fix first. Signals matter.

Take 8

OK, glad I got that off my chest.

Last week’s well-sourced Wall Street Journal story on the PBOC was interesting to me for its information on the domestic politics of the Chinese currency, not for the news that China’s currency is “back under tight government control.” For those who like stories on China’s internal currency politics, I suspect it is up there with the Reuters story from last August highlighting the political pressures on the PBOC.

And it raises one of the most critical ongoing questions in the global economy: what has driven large-scale Chinese reserve sales?

There are two theories.

Read more »

Dan Drezner Asked Three Questions

by Brad Setser

He gets three half answers.

Drezner’s first question: “Just how much third-party holdings of U.S. debt does Saudi Arabia have?”

Wish I knew. The custodial data doesn’t really help us out much. $117 billion—around 20 percent of reserves—certainly seems too low. So it is likely that the ultimate beneficiaries of some of the Treasuries custodied in places like London, Luxembourg or even Switzerland (Swiss holdings are bit higher than can be explained by the Swiss National Bank’s large reserves) are in Saudi Arabia or elsewhere in the Gulf.

Europe Custodial Holdings

The Saudi Arabian Monetary Agency (SAMA) is generally thought to be a bit of a hybrid between a pure central bank reserve manager (which invests mostly in liquid assets, typically government bonds) and a sovereign wealth fund (which invests in a broader range of assets, including illiquid assets). So there is no reason to think that all of SAMA’s assets are in Treasuries.

There are a couple of benchmarks though that might help.

If you sum the Treasury holdings of China and Belgium in the Treasury International Capital (TIC) data (Belgium is pretty clearly China, not the Gulf) and compare that total with China’s reserves, Treasuries now look to be around 40 percent of China’s total reserves. Other countries have moved back into agencies, so Treasury holdings aren’t a pure proxy for a country’s holdings of liquid dollar bonds. But this still set out a benchmark of sorts.

And if you look at the IMF’s global reserves data (sadly less useful than it once was, as the data for emerging economies is no longer broken out separately), central banks globally hold about 65 percent of their reserves in dollars. This also sets out a benchmark. Countries that manage their currencies tightly against the dollar would normally be expected to hold a higher share of their reserves in dollars than the global average, though this imperative dissipates a bit when a country’s reserves far exceeds its short-term needs.

Read more »

Bye, Bye Asian Oil

by Brad Setser

“Asian Oil Exporters” always was a geographically accurate yet still somewhat misleading subcategory of the Treasury International Capital (TIC) data release.

Technically, the Gulf is in Asia, and Asian oil exporters were a set of countries that could be differentiated from African oil exporters. But the title wasn’t terribly helpful either. Not for a set of countries—the GCC countries (Saudi Arabia, the United Arab Emirates, Qatar, Bahrain, Oman, and Kuwait), Iraq, and Iran—in what more commonly is called the Middle East.

And, thanks to a wise decision by the U.S. Treasury to release the disaggregated data, it will soon be only of historic interest. The Treasury didn’t just release the current Treasury security holdings (or to be more precise, their holdings of Treasury securities in U.S. custodial accounts) for individual Gulf and Caribbean countries, it also released the historical time series. That is the way to immediately establish the credibility of a data series (Take note, for example, of the difficulty in interpreting China’s Special Data Dissemination Standard [SDDS] release, including the lines on China’s forward book, without back data).

So, shock of all shocks, we now know Iran doesn’t own any Treasuries. At least not any in U.S. custodial accounts.

The real story in the data, though, is the lack of any real story. The Gulf countries do not keep that many Treasuries in U.S. custodial accounts, so there wasn’t much for the disaggregated data to reveal.

That has long been apparent from the aggregated data. The $250 billion or so of Treasuries held by “Asian oil exporters” was small relative to combined reserves of these countries (excluding Iran, for obvious reasons) of around $1 trillion. And after say 2010, the changes in the Gulf’s combined Treasury holdings haven’t even really moved with their reported reserves.

BChart4

Read more »