Brad Setser

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Cross border flows, with a bit of macroeconomics

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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.


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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Just How Big Is China’s External Surplus? Measurement Matters

by Brad Setser

Here are two views of China’s (goods) trade. Both use the exact same data.

The first presents China’s goods exports and imports as a share of the rest of the world’s GDP:


The second presents China’s goods exports and imports as a share of China’s own GDP:


From the point of view of the world, the gap between China’s goods exports and its imports is as big as it has ever been. And China’s exports were, until recently, rising as a share of world GDP.

From the point of view of China, exports have become less important as a share of China’s own GDP. And so have imports

Though I would note the “rebalance” away from exports came immediately after the global crisis, when China engaged in its massive credit fueled off balance sheet stimulus that juiced investment. Since 2011 or so, both China’s exports, net of processing imports, and its manufacturing surplus have both been fairly stable as shares of China’s GDP (exports net of processing are about 15 percent of China’s GDP, and the manufacturing surplus is 8-9 percent of China’s GDP).

Stories that suggest that China has become significantly less competitive in manufacturing strike me as off, particularly now that the RMB has depreciated from its high last summer. China’s surplus in manufacturing reflects the balance between exports, where growth has slowed subsequent to the renminbi’s 2014-15 appreciation (though it could pick up again now that the appreciation has largely been reversed) and China’s imports. Export growth and export job growth has slowed. But manufactured imports—including imports of components—are falling sharply as a share of China’s GDP. More and more of the components in goods that are assembled in China are also now made in China. I would bet the imported content in Huawei’s network equipment is modest. The IMF found in 2015 (see Box 10) that China hasn’t lost all that much global market share in labor intensive exports even as it moved up the electronics value chain.

And the goods needed to meet China’s own demand are increasingly made in China.

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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.


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.

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China’s June Trade Data

by Brad Setser

One small thing to remember: For China, the yuan value of its exports matters more than the dollar value of its exports. And the yuan value of China’s June exports was up slightly (buried in the Reuters story: “Exports in yuan terms rose 1.3 percent”).

One other thing to remember: China’s export prices are falling. For lots of reasons. But it is clear that Chinese exporters have not held their dollar prices constant and pocketed the gains from a weaker currency. Export prices, in yuan terms, have been running about 5 percent below their 2015 levels.

The information that allows the export price index for June to be inferred isn’t yet out, but if you project May prices into June, it is possible to estimate the June rise in export volumes. I get a modestly positive number. And looking at the year-over-year changes in the trailing 3 month averages (all monthly trade data has a lot of noise, so I always try to smooth a bit), China’s exports look to be growing significantly faster than say U.S. exports.


As one might expect based on exchange rate moves.

(As an aside, the jump in export volumes in early 2013 is fake; it reflects over-invoicing, and the fall in early 2014 is equally fake, as the over-invoicing falls out of the data. The strong 2014 and weak 2015 are in my view real.)

And if you like your data pure, without any adjustments, the same basic story shows up in the data showing the year-on-year changes in monthly volumes that China directly reports. The last data point in this series is from May, and I used a 3 month trailing average.

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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.

China’s Asymmetric Basket Peg

by Brad Setser

The implications of Brexit understandably have dominated the global economic policy debate. But there are issues other than Brexit that could also have a large global impact: most obviously China and its currency.

The yuan rather quietly hit multi-year lows against the dollar last week. And today the yuan-to-dollar exchange rate (as well as the offshore CNH rate) came close to 6.7, and is not too far away from the 6.8 level that was bandied about last week as the PBOC’s possible target for 2016.*


The dollar is—broadly speaking—close to unchanged from the time China announced that it would manage its currency with reference to a basket in the middle of December.*


So the yuan might be expected to be, very roughly, where it was last December 11. December 11 of course is the day that China released the China Foreign Exchange Trade System (CFETS) basket. Yet since December 11, the yuan is down around 1.5% against the dollar, down about 5 percent against the euro and down nearly 19 percent against the yen.

The reason why the renminbi is down against all the major currencies, obviously, is that managing the renminbi “with reference to a basket” hasn’t meant targeting stability against a basket. As the chart above illustrates, over the last seven months the renminbi has slowly depreciated against the CFETS basket. The renminbi has now depreciated by about 5 percent against the CFETS basket since last December, and by about 10 percent since last summer.

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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.


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.

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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.

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The Leak in China’s Controls From Hong Kong Imports Is Still Small

by Brad Setser

The jump in China’s imports from Hong Kong has generated a bit of attention recently.

Monthly imports have gone from around $1 billion this time last year to around $3 billion. It is very reasonable to think that this rise reflects a new way of getting money out of China, rather than a change in the underlying pattern of trade.


But plots showing that imports have risen by a some crazy percent miss something important. The magnitudes of the over-invoiced imports are still small. Annualized, the $2 billion monthly difference is about $25 billion.

The likely over-invoicing of imports through Hong Kong is also still significantly smaller than the over-invoicing of exports through Hong Kong back in late 2012 and early 2013. In March 2013, exports to Hong Kong were almost $25 billion higher than in March 2012, and first quarter 2013 exports to Hong Kong were up almost $50 billion year-over-year. The implied annual pace of inflows then was close to $200 billion. That was big enough to inflate the overall level of exports in 2013, and thus it had a rather meaningful impact on the year-over-year growth in China’s exports in 2014.


And if you are really looking for hidden capital outflows, I personally would focus on the tourism accounts more than goods imports from Hong Kong. Imports of travel services rose by about $100 billion in 2014, jumping $128 billion in 2013 to $236 billion in 2014.* The 85 percent annual rise in travel spending reported in the 2014 balance of payments far exceeded the at-most 20 percent increase in the number of Chinese tourists** travelling abroad. Travel imports jumped another $50 billion in 2015 to $292 billion—real money, and a two-year increase of well over 100 percent.

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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.


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.

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