Brad Setser

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Cross border flows, with a bit of macroeconomics

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Asia’s Persistent Savings Glut

by Brad Setser

Back in 2005, when Ben Bernanke first warned of the risk of a global savings glut, the combined savings rate of Asia’s main “surplus” economies (China, Japan, South Korea, Taiwan, Hong Kong, and Singapore) equaled 35 percent or so of their collective GDP.

That number now? About 40 percent.


That is obviously a lot of savings—savings which either has to finance a very high level of investment at home or has to be exported to the rest of the world. And with low interest rates around the world, the world doesn’t especially need to import savings from Asia right now.

East Asia’s high level of savings is the subject, obviously, of my new CFR working paper.

Much is often made of the small fall in China’s national savings rate. China’s savings rate peaked at a bit over 50 percent of GDP; in 2015 it dipped to 48 percent. A fall, yes, but not a big one. Remember that the flip side of high savings is a low level of consumption; without high levels of investment, domestic demand growth can easily fall short.

In the aggregate data for Asia’s surplus countries, the rise in China’s share of the region’s output more than offsets the (modest) fall in China’s savings rate. The national savings rate in Korea and Taiwan has also increased over the last five years. Hence record regional savings.

In dollar terms, the jump in savings is even more spectacular. Asian surplus economies saved around $2.8 trillion back in 2005. Now they save around $7 trillion. China’s savings have increased from $1 trillion to more than $5 trillion.

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China’s September Reserve Sales (Using the Intervention Proxies)

by Brad Setser

The most valuable indicators of China’s intervention in the foreign exchange (FX) market are now out, and both point to a pick-up in sales in September, and more generally in Q3.


The data on FX settlement shows $27b in sales in September, and around $50b in sales for Q3. Add in changes in the forwards (new forwards net of executed forwards) reported in the FX settlement data, and the total for September rises to $33 billion, and the total for Q3 gets to around $60 billion. FX settlement is my preferred indicator, though it is always important to see how it lines up with other indicators.

The data on the PBOC’s balance sheet shows a $51 billion fall in reserves in September, and a fall of over $100 billion in Q3. I like to look at the PBOC’s foreign assets as well as reserves, this shows a slightly more modest fall ($47 billion in September), as the PBOC’s other foreign assets continued to rise. But total foreign assets on the PBOC’s balance sheet are still down around $95 billion in q3 (with a bigger draw on reserves than implied by the settlement data, which includes the banking system; chalk the gap between settlement and the PBOC’s balance sheet up as something to watch).

$100 billion in a quarter isn’t $100 billion a month—but it is noticeably higher than in Q2.

All in all, the pressure on China’s “basket peg” or “basket peg with a depreciating bias” exchange rate regime (take your pick on what managing with reference to a basket means, it certainly has meant different things at different points in time this past year) is now large enough to be significant yet not so large as it appears to be unmanageable.

China still has plenty of reserves; I wouldn’t even begin to think that China is close to being short of reserves until it gets to $2.5 trillion given China’s limited external debt, tiny domestic liability dollarization, and ongoing external surpluses. $2.5 trillion would still be the world’s biggest reserve portfolio by a factor of two, it also would be roughly 20 percent of China’s GDP, which would be in line with what many emerging markets hold.

The depreciation in October has been consistent with maintaining stability against the CFETS basket, though stability at a level against the basket that reflects the depreciation that took place from last August to roughly July. The dollar has appreciated against the other major tradeable currencies in October this period, and maintaining stability against the CFETS basket meant depreciating somewhat against the dollar.

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China: Too Much Investment, But Also Way Too Much Savings

by Brad Setser

Most analysis of China’s economy emphasizes the risks posed by China’s high level of investment, and the associated rise in corporate debt.

Investment is an unusually large share of China’s economy. That high level of investment is sustained by a very rapid growth in credit, and an ever-growing stock of internal debt. Corporate borrowing in particular has increased relative to GDP. Not all this investment will generate a positive return, leaving legacy losses that someone will have to bear. Rapid credit growth has been a fairly reliable indicator of banking trouble. China is unlikely to be different.

Concern about the excesses from China’s investment boom permeate the IMF’s latest assessment of China, loom large in the BIS’s work, and the blogosphere. Gabriel Wildau of the Financial Times:

“Global watchdogs including the International Monetary Fund and the Bank for International Settlements (not to mention this blog) have become increasingly shrill in their warnings that China’s rising debt load poses global risks.”

Yet I have to confess that defining China’s primary macroeconomic challenge entirely as “too much debt financing too much investment” makes me a bit uncomfortable.

Investment is a component of aggregate demand. Arguing that China invests too much comes close to implying that, as a result of its credit boom/ bubble, China is providing too much demand to its own economy, and, as a result, too much demand for the global economy.

That doesn’t seem entirely right.

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Chinese Exports and Imports Are Growing in 2016 (In Real Terms)

by Brad Setser

I liked John Authers’ FT column on China, and basically agree with it.

The chart showing the correction in the yuan’s value against a broad trade-weighted index is especially helpful. A lot depends on the particular index you use, but there should be no doubt that a significant part of the yuan’s broad appreciation in late 2014 has now been reversed.

I did take issue with one point. Authers writes that both Chinese exports and imports are on a declining trend.

“Chinese exports dropped noticeably last month (causing a frisson in global markets). Meanwhile, imports ticked up, suggesting at least some life in the Chinese economy. Both imports and exports are on a steadily declining trend, so China’s economy is slowing down.”

That is true in dollar terms, but not in “volume” (or real) terms.


Using China’s own data for the year to August, exports are up a modest 1.8 percent (versus the same period a year ago), and imports are up 3.4 percent. Throw in an estimate for September’s volumes (-1 percent on exports, + 1 percent on imports: this is without any adjustment for working data) and the numbers are down a bit, but still positive year over year (1.5 percent for exports, 3.1 percent for imports).

On the export side, q1 was bad—export volumes were down a couple of points (the 2014 q1 base was a pretty good, which is part of the story. But I think q2 and q3 both show roughly 3 percent y/y growth in export volumes—a strong August is offset by a weak September.

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China September Exports: Not Quite as Bad as They Seem?

by Brad Setser

The 5.6 percent fall—in the yuan data—in China’s September exports was a surprise. Exports had been rising in yuan terms, and in volume terms, since March. I expected the rise to continue, largely because the pickup in volumes is consistent with the expected impact of the 8 percent fall in the broad yuan (using the BIS index) since last July.

And I am very conscious of the risk of interpreting data to fit your prior beliefs, and thus missing a new signal.

That said, I do think there are a couple of reasons why the fall in exports may not be indicative of a shift in trend.

The first is straightforward: there was one fewer working days in China this September than last September (22 versus 21; data are here). Nominal exports, in yuan, per working day, fell by 1 percent.

This argument should not be overstated. There were more working days this August than last August, so nominal exports, in yuan, per working day, were down in August.

The more important reason is a bit more complicated. Chinese export prices jumped last September, in the immediate aftermath of the yuan’s August depreciation. Each dollar in exports generated more yuan. Over time, though, export prices have come down. They are now lower than their pre-August devaluation levels.


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China’s September Reserves, and Q2 Balance of Payments

by Brad Setser

China’s headline reserves dipped by about $19 billion in September, dropping below $3.2 trillion. Adjust for foreign exchange changes, and the underlying fall is widely estimated to be a bit more—around $25 billion.

Press coverage emphasized that the fall “exceeded expectations.” To me that suggests “expectations” on China’s reserves aren’t formed in all that sophisticated a way.

$20-30 billion in sales is in line with the change in the PBOC’s balance sheet in July and August (the FX settlement data, the other key proxy for intervention, suggests more modest sales in August). Throw in the September spike in the Hong Kong Inter-bank Offered Rate (HIBOR) —which suggested a rise in depreciation pressure on the CNY and CNH —and $25 billion in sales is if anything a bit smaller than I personally expected.* Of course, some of the sales could be coming through the state banks; time will tell.

Even if the pace of sales did not pick up in September, there is is an interesting story in the Chinese data. The $75 billion a quarter and $300 billion a year pace of sales implied by the July-September monthly data aren’t anything like the pace of sales at the peak of pressure on China’s currency. But $75 billion a quarter is a still bit higher than the underlying pace of sales in Q2.

The balance of payments data show Q2 reserve sales of about $35 billion (the change in the PBOC’s balance sheet reserves was $31 billion). But other parts of China’s state added to their foreign assets in Q2. In fact, counting shadow intervention (foreign exchange purchases by state banks and other state actors), I actually think the government of China’s total foreign assets may have increased a bit in the second quarter.


There are a couple of line items in the balance of payments that seem to me to be under the control of the state and state actors. Most obviously, the line item that corresponds with the PBOC’s other foreign assets (“other, other, assets” in balance of payments speak: up $12 billion in q2, after a bigger rise in q1). But most portfolio outflows are likely from state-controlled institutions (portfolio debt historically has been the state banks, portfolio equity historically has been the China Investment Corporation and the state retirement funds in large part). If these flows are netted against reserve sales, there wasn’t much of a change in q2. In my view, shifts in assets within the state should be viewed differently than the sale of state assets to truly private actors.

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The ECB on the Slowdown in Global Trade

by Brad Setser

I really liked the ECB’s recent report on the slowdown in global trade (summarized here), for five reasons.

1) It doesn’t assume that trade should always grow faster than output. A liberalization of trade (or a fall in transportation costs—or less attractively, new opportunities to take advantage of transfer pricing) should lead to expansion of trade, but only until a new equilibrium level is reached. In the long-run, an elasticity of around 1 (e.g. trade grows with demand for traded goods) makes some sense.

2) It (implicitly) casts a somewhat skeptical eye on the expansion of trade from 2001 to 2007, and doesn’t assume that the growth in trade over this period was completely sustainable. The 2001-07 expansion of trade was associated with an exceptionally fast pace of growth in Chinese exports, one, I would add, not matched by comparable growth in China’s imports (especially of manufactures); it thus was sustainable only so long as the rest of the world ran large external deficits to balance China’s large surplus.

“In 2001- 07, China’s exports rose faster by about 15 percentage points than import demand in its main markets; by 2008-13, this differential had fallen to 6 percentage points (see Chart A). Waning competitiveness over that period may have played a role: China’s real effective exchange rate (based on relative producer prices) has appreciated by about one-quarter since 2005. At the same time, China’s exports had to slow eventually – they cannot outstrip the expansion of export markets in the long term.”

During this period Chinese export growth filtered throughout Asia. Rising Chinese exports to Europe, the United States, and commodity exporters (who could afford to buy more manufactures because the price of commodities rose) led to an increase in Chinese imports of components (global value chains), though after 2004, as I will argue below, component imports started to lag export growth.

3) It notes that the recent slowdown in trade has been marked by a very large shift in China’s import elasticity. For the past several years Chinese import growth has significantly lagged Chinese GDP growth.

“The recent decline in China’s income elasticity of imports has been striking and has made a marked contribution to the fall in the world trade elasticity. China’s trade elasticity dropped from 1.8 in 1980- 2007 to 0.8 in 2012-15. The fall in imports in 2015 was particularly stark, with imports expanding by just 2%, despite robust economic activity”

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China’s Tourism Puzzle Has Gone Mainstream

by Brad Setser

Or at least it is on Bloomberg.

I wanted to elaborate on three points:

First, the increase in China’s tourism spending, if it is real, is huge. The reported rise in tourism spending by China since 2012 is about equal to the reported fall in Chinese commodity (primary product) imports. A $200 billion move over roughly 2 and a half years (the Chinese data indicates spending by Chinese tourists abroad–imports of travel services in the data–have increased from $120 billion in 2013 to about $315 billion in the last four quarters of data)* is real money.


Second, the timing of the rise corresponds to a change in the methodology used to collect China’s balance of payments data. Most of the jump now shows up in the 2014 data.* SAFE’s presentation to the IMF on the implementation of the IMF’s new balance of payments data standard is remarkably honest; they don’t seem to have any idea if their new data set—based on credit card data and the like—really captures tourism spending abroad, or captures something else.** Under a heading titled “related issues to the new method” SAFE notes:

“For example, some remittance reported as travel in ITRS (International Transactions Reporting System) and some overseas purchases via bank card are actually goods transactions, because the money is used for valuables and durable goods, Sometimes, the money is used for investment abroad, which should be included in financial account. However, without further information, it is hard to identify how much should be allocated to goods item or financial account”

My argument is simple: in correcting for potential problems in the old data, China introduced a new set of problems—and those problems appear to be quite large.

The new method likely moved some financial outflows to the current account, and thus it has had the effect of reducing China’s current account surplus. The large rise in travel imports is a big reason why the gap between China’s goods surplus and its current account surplus is now so large—and in my view, there is growing reason to think that the goods surplus may now be the more accurate measure of China’s impact on the global economy. At least since 2013.

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The August Calm (Updated Chinese Intervention Estimates)

by Brad Setser

The proxies that provide the best estimates of China’s actual intervention in the foreign currency market in August are out, and they in no way hint at the stress that emerged in Hong Kong’s interbank market in September.

The PBOC’s balance sheet shows foreign currency sales of between $25 and $30 billion (depending on whether you use the number for foreign currency reserves or for foreign assets). A decent sum, but also a sum that is consistent with the pace of sales in July.


SAFE’s data on foreign exchange settlement, which in my view is the single best indicator of true intervention even though (or in part because) it aggregates the activities of the PBOC and the state banks, actually indicates a fall-off in pressure in August. The FX settlement suggests sales of around $5 billion in August. Even after adjusting for reported changes in forwards (the dashed line above).

All this said, there is no doubt something changed in September. The cost of borrowing yuan offshore spiked even though the exchange rate has been quite stable against the dollar and generally stable against the CFETS basket.


Two theories.

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China Can Now Organize Its Own (Financial) Coalitions of the Willing

by Brad Setser

Just before the global financial crisis, I wrote a paper on the geostrategic implications of the United States’ growing external debt—and specifically about the fact that the U.S.’s main external creditors were increasingly the reserve managers of other states, not private investors. Yes, there were large two-way gross private flows in the run up to the crisis; think U.S. money market funds lending to the offshore arms of European banks who in turn bought longer-term U.S. securities. But, on net, the inflows needed to sustain the United States’ external deficit from 2003 on mostly came from the world’s big holders of reserves and oil exporters who stashed funds away in sovereign wealth funds.

With hindsight, I, and the others who speculated about how China’s Treasury holdings might be used for political leverage over-egged the pudding, as Dan Drezner, among others, has pointed out.

Greece’s indebtedness to private bond holders and banks proved a bigger constraint on its economic sovereignty than the debt the United States owes to the PBOC and other official investors. Germany was the creditor country that ended up with the leverage, not China.

And thinking back even further, Britain’s geostrategic vulnerability to the withdrawal of U.S. financing in the Suez crisis derived from its commitment to maintaining the pound’s external value. Letting the pound float was inconceivable at the time.

That as much as anything gave the U.S. leverage over Britain. Worth remembering.

I could argue that the global crisis reduced the United States’ need for all kinds of external financing significantly, which is true—and that the leverage that comes from the perception that China could rattle markets in times of stress has not entirely gone away.

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