Brad Setser

Follow the Money

Cross border flows, with a bit of macroeconomics

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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.

primary-v-travel-imports

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.

cny-9-19-fx-settlement

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.

cny-indexes

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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Imbalances Are Back, In Asia and Globally

by Brad Setser

The Economist, inspired in part by a recent paper by Caballero, Farhi and Gourinchas, highlighted two key points in its free exchange column criticizing Germany’s surplus:

a) Global imbalances have reemerged over the last few years (though this is more obvious from summing the surpluses of surplus countries than from summing the deficits of deficit countries): “… a sustained era of balanced growth failed to emerge [after the global crisis]. Instead, surpluses in China and Japan rebounded. In recent years Europe has followed, thanks to a big switch from borrowing to saving.”
b) Those imbalances are a big reason why interest rates globally are low: “Once a few economies become stuck in the zero-rate trap, their current-account surpluses exert a pull which threatens to drag in everyone else.”

I have only one small quibble. The rise in Asia’s surplus didn’t just come immediately after the crisis. There was also a significant rise in Asia’s surplus from 2013 to 2015.

Indeed, in 2015, East Asia’s combined surplus actually significantly exceeded that of Europe, adding to the world’s difficulty generating enough demand growth even with ultra-low rates.*

CA Europe and Asia

Yes, some of this is oil. But the oil exporters in aggregate aren’t running large external deficits financed by their high saving customers (Russia is in surplus; the Saudis are more an exception than the rule). The IMF puts the aggregate deficit of the main oil exporting regions of the world economy (the Middle East, North Africa, Russia and Central Asia) at $50-100 billion, substantially less than the combined surplus of Europe and Asia. So it isn’t all oil either.

China’s unloved, credit-based stimulus, together with the large reported increase in tourism spending (whether real or fake), looks set to pull China’s surplus down a bit in 2016. But China will retain a surplus of over $200 billion in 2016, and ongoing surpluses in Korea, Taiwan, Singapore and Japan will keep Asia’s aggregate surplus high. I would bet East Asia’s aggregate 2016 surplus will still exceed that of Europe.

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The 2016 Yuan Depreciation

by Brad Setser

The Bank for International Settlements’ (BIS) broad effective index is the gold standard for assessing exchange rates. And the BIS shows—building on a point that George Magnus has made—that China’s currency, measured against a basket of its trading partners, has depreciated significantly since last summer. And since the start of the year. On the BIS index, the yuan is now down around 7 percent YTD.

Those who were convinced that the broad yuan was significantly overvalued last summer liked to note how much China’s currency had appreciated since 2005.

But 2005 was the yuan’s long-term low. And the size of China’s current account surplus in 2006 and 2007 suggests that the yuan was significantly undervalued in 2005 (remember, currencies have an impact with a lag).

I prefer to go back to around 2000. The yuan is now up about 20 percent since then (since the of end of 2001 or early 2002 to be more precise).

And twenty percent over 15 years isn’t all that much, really.

Remember that over this time period China has seen enormous increases in productivity (WTO accession and all). China exported just over $200 billion in manufactures in 2000. By 2015, that was over $2 trillion. Its manufacturing surplus has gone from around $50 billion to around $900 billion. China’s global trade footprint has changed dramatically since 2000, and a country should appreciate in real terms during its “catch-up” phase.

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China’s Ever More Mysterious Tourism Numbers

by Brad Setser

China’s deficit in tourism is over 40 percent of China’s goods surplus (the other parts of services trade are in rough balance; China’s services deficit is for now all tourism); the tourism deficit is one of the main reasons why the rise in China’s goods surplus hasn’t led to a corresponding rise in China’s current account deficit.

And the tourism deficit has materialized quickly. In 2013, China’s imports of tourism (travel services, in BoP speak) were about $100 billion. In the last four quarters of data, tourism imports were around $320 billion. The corresponding deficit rose from $75 billion in 2013 to over $200 billion in the last four quarters of data.

It is one hell of a boom. China’s increased spending on tourism is getting close to equaling its decreased spending on commodities, and we all know that that has had a big global impact.

And the IMF projects that China’s tourism boom will continue. The IMF’s long-term current account forecast assumes that continued explosive growth in tourism will pull China’s current account surplus back to around 1 percent of GDP even as China’s goods surplus remains elevated. A roughly $200 billion services deficit in 2015 will become a $500 billion deficit in 2020 (3 percent of $16 trillion is a big number; see table 2 on p. 40).

There is only one problem with China’s current tourism boom: It isn’t confirmed in the data reported by China’s counterparties in the tourism trade.

No one should doubt that Chinese tourism to Japan has increased enormously. It shows up in the Japanese arrivals data. It fits with a broader policy decision to liberalize visas. And it fits with economic theory too; the weaker yen has made Japan affordable to a broader group of Chinese residents.

But spending by Chinese tourists in Japan is also too small relative to the total to drive the data.

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IMF Cannot Quit Fiscal Consolidation (in Asian Surplus Countries)

by Brad Setser

In theory, the IMF now wants current account surplus countries to rely more heavily on fiscal stimulus and less on monetary stimulus.

This shift makes sense in a world marked by low interest rates, the risk that surplus countries will export liquidity traps to deficit economies, and concerns about contagious secular stagnation. Fiscal expansion tends to lower the surplus of surplus countries and regions, while monetary expansion tends to increase external surpluses.

And large external surpluses should be a concern in a world where imbalances in goods trade are once again quite large—though the goods surpluses now being chalked up in many Asian countries are partially offset by hard-to-track deficits in “intangibles” (to use an old term), notably China’s ongoing deficit in investment income and its ever-rising and ever-harder-to-track deficit in tourism.

In practice, though, the Fund seems to be having trouble actually advocating fiscal expansion in any major economy with a current account surplus.

Best I can tell, the Fund is encouraging fiscal consolidation in China, Japan, and the eurozone. These economies have a combined GDP of close to $30 trillion. The Fund, by contrast, is, perhaps, willing to encourage a tiny bit of fiscal expansion in Sweden (though that isn’t obvious from the 2015 staff report) and in Korea—countries with a combined GDP of $2 trillion.*

I previously have noted that the Fund is advocating a 2017 fiscal consolidation for the eurozone, as the consolidation the Fund advocates in France, Italy, and Spain would overwhelm the modest fiscal expansion the Fund proposed in the Netherlands (The IMF is recommending that Germany stay on the fiscal sidelines in 2017).

The same seems to be true in East Asia’s main surplus economies.

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$3.2 Trillion (Actually a Bit More) Isn’t Enough? The Fund on China’s Reserves

by Brad Setser

China is running a persistent current account surplus, one that could be larger than officially reported (the huge tourism deficit looks a bit suspicious).

If China paid off all its external debt, it would still have around $2 trillion in reserves.* If it paid off all its short-term debt, it would have $2.5 trillion in reserves.

And China has a very low level of domestic liability dollarization (3 percent of total deposits are in foreign currency)

True, $3.2 trillion ($3.3 trillion if you include the PBOC’s other foreign assets, as you should, and as much as $3.5 trillion if you include the China Investment Corporation’s foreign portfolio, which is more debatable) isn’t $4 trillion.**

But much of the fall in reserves over the last 18 months has stemmed from the use of reserves to repay China’s short-term external debt. The IMF projects that China’s short-term external debt will have fallen from $1.3 trillion in 2014 to just over $700 billion by the end of this year.

Reserves are down, but—from an external standpoint—China’s need for reserves is also down. The two year fall in short-term debt is actually about equal to projected drop in reserves.

The Fund though sees things a bit differently. Buffers, according to the Fund’s staff report, are now low, and need to be rebuilt. Some in the market agree.

And that gets at a critical issue for China, and a critical issue for assessing reserve adequacy more generally. Just how many reserves do countries like China, need?

For China, two “traditional” indicators of reserve adequacy—reserves to short-term debt and reserves to broad money—point in completely different directions.

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China’s July Reserve Sales: Bigger, But Still Not That Big

by Brad Setser

The proxies for China’s foreign exchange intervention in July are now available, and they point to $20 to $30 billion of reserve sales.

The PBOC’s foreign assets fell by about $23 billion (The PBOC’s foreign reserves, as reported on the PBOC’s renminbi balance sheet, fell by $29 billion; I prefer the change in the PBOC’s foreign assets though, as foreign assets catches the foreign exchange that banks hold at the PBOC as part of their reserve requirement).

FX settlement with non-banks shows net sales of around $20 billion. Throw in the change in forwards in the settlement data, and total sales were maybe $25 billion.

All the proxies show more variation than appeared in headline reserves, which only fell by $5 billion. I trust the proxies.

The bigger story, I think, is two-fold.

One is that there is still a correlation between FX sales and moves in the yuan against the dollar. In June and July the yuan slid against the dollar, and the magnitude of FX sales increased. That fits a long-standing pattern.

china-fx-settlement-vs-cny

The second, and far more important point, is that the magnitude of sales during periods when the yuan is depreciating against the dollar are significantly smaller than they were last August, or back in December and January.

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China’s Reported Tourism Deficit Got Big, Fast

by Brad Setser

Several times I have alluded to the suspicious rise in China’s tourism deficit. The tourism deficit more than explains the rise in China’s services deficit, and the rise in the services deficit explains why the increase in China’s current account surplus hasn’t tracked the increase in China’s goods surplus.

Why the suspicion? Simple. Tourism imports soared in 2014, at a time when all other Chinese imports were either falling or experiencing a slowdown in the pace of growth.

yoy-China-imports

The actual data on tourism “visits” tells two stories.

There is a big falloff in Chinese tourism to Hong Kong and Macau, falling retail sales in these traditional destinations for Chinese tourists, and soft Asian sales of “luxury” goods.

But there is also no doubt destinations like Thailand and Japan (remember the yen move) saw a big increase in arrivals from China.

Sum it all up though, and the number of tourists travelling abroad in 2014 looks to have increased by about 10 percent (from 100 to 110 million or so) in line with past growth. Look at this Goldman Report.* With an increase in nominal spending per tourist it is possible to imagine tourism growth of say 20 percent. Not 80 percent. 2015 seems similar. Visits to Hong Kong and Macau fell.

So what is going on in the balance of payments (BoP) data? No doubt many things. China seems to have revised its methodology for “counting” tourism in the balance of payments in some way, leading to a jump in both imports and exports in 2014. Tourism imports rose by a giant $100 billion in 2014 (with a slowing economy) after growing by $40 billion in 2013. Tourism exports were adjusted up too, but not by nearly as much.

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