Posted on Tuesday, April 15th, 2008
By bsetser
The head of the People’s Bank of China says that China is seeking to diversify its reserves.
“China is seeking to diversify its foreign exchange reserves,” Zhou said yesterday, without elaborating.
Of course, Zhou also said that the market now plays the dominant role in the determination of China’s exchange rate, a view which is hard — in my view — to square with record central bank purchases of foreign exchange.
Diversification could mean one of three things:
– Adding new currencies to China’s reserve mix
– Diversifying the kind of dollar assets China holds
– Reducing the share of China’s reserves held in dollars
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Posted in China, emerging economies | 13 Comments »
Posted on Sunday, April 13th, 2008
By bsetser
The data at the back of the IMF’s latest WEO (table A16) indicate that the emerging world’s savings surplus stems from a “glut” of savings, not a “drought” of investment.
In 2007, the savings rate of the emerging world savings was almost 10% of GDP higher than its 1986-2001 average. Investment was up as well – in 2007, it was about 4% higher than its 1986-2001 average. However the rise in the emerging world’s savings was so large that the emerging world could invest more “at home” and still have plenty left over to lend to the US and Europe. That meets my definition of a “glut.”
The big drivers of this trend. “Developing Asia” and the “Middle East.” Developing Asia saved 45% of its GDP in 2007 — up from 33-34% in 2002 and an average of 33% from 1994 to 2001 (and 29% from 86 to 93). Investment is up too. Developing Asia invested 38% of its GDP in 2007, v an average of between 32-33% from 1994 to 2001. Investment just didn’t rise as much as savings. The Middle East also saved 45% of its GDP in 2007 – up from 28% of GDP back in 2002 and an average of 25% from 1994 to 2001 and an average of 17-18% from 1986 to 1993. Investment is up just a bit — at 25% of GDP in 2007 v an average of 22% from 1994 to 2001.
It is historically unusually for an oil importing region to be saving so much when the oil exporters are also saving so much. Usually a rise in the savings of the oil exporters is offset by a fall in the savings of the oil importers. The enormous rise in Chinese savings even as China’s oil import bill has soared (along with oil export revenues and oil exporters’ savings) implies a bigger fall in the savings of other oil importing economies.
Government policy has played a big role in the high savings rates in both regions – whether the undistributed profits of Chinese state firms (a policy choice) or large fiscal surpluses of the Gulf financed by the undistributed profits of the Gulf’s state oil companies. It isn’t an accident that the emerging world’s savings glut has coincided with a rise of state capitalism – and a surge in demand from states and state enterprises for “flying palaces.” I suspect the emerging world’s savings glut largely reflects a glut in government (and SOE) savings.
Dr. Delong has argued that this savings surplus will persist for a long time, keeping US and European rates low and keeping housing prices in both the US and Europe higher than otherwise would be the case. Krugman’s fear that home prices need to fall significantly to bring the price-to-rent ratio closer to its long-term average won’t be borne out.
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Posted in U.S. trade deficit and external debt, emerging economies | 49 Comments »
Posted on Tuesday, March 4th, 2008
By bsetser
In a recent FT oped on China, Ken Rogoff had a great one-liner:
“Those who think inflation is caused by too little pork rather than too much money are wrong.”
Replace pork - culturally inappropriate for many high-inflation emerging market economies - with a more culturally neutral food, and his statement captures the core debate in a host of emerging economies right now.
The Gulf, Russia, Argentina, Hong Kong, China and no doubt others are trying to determine whether the recent rise in inflation reflects a rise in commodity prices (fuel, food) or inappropriately loose monetary policies. Stephen King of HSBS isn’t as pithy as Dr. Rogoff, but he framed the issue quite nicely last week:
Broadly, there are two competing explanations for the rise in emerging market inflation. The first is what I’d call the "bad luck" explanation. Those living in emerging markets have, on average, lower per capita incomes than those who live in the developed world. Proportionately, more of their income is spent on basic items such as fuel and food. The prices of these "basics" tend to move around in volatile fashion in response to bad harvests, occasional wars or the onset of disease. As a result, inflation rates within emerging economies move up and down a lot more than their equivalents in the developed world. High inflation in one year could easily be followed by low inflation the next year.
The second explanation is monetary in nature. Inflation is rising because monetary conditions are simply too loose. And because people in emerging markets spend most of their income on the basics, it’s no great surprise that the prices of fuel, food and other essentials go up. This is not a case of bad luck. It is, instead, the outcome (perhaps unintended) of a series of earlier monetary policy decisions
Most of the high inflation emerging economies either peg to the dollar or intervene heavily to manage their exchange rate against the dollar.
Ben Bernanke though can not really be blamed the rise in inflation these economies.
No one forced the Saudis - just to pick an example — to peg to a depreciating dollar and cut domestic rates even as domestic Saudi inflation rose. The Saudis could have dropped their dollar peg. Bernanke’s mandate is to pursue policies that support price stability and employment in the US - not to balance the monetary policy the US needs with the monetary policy the rest of the dollar zone needs.
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Posted in emerging economies | 55 Comments »
Posted on Thursday, February 28th, 2008
By bsetser
A lot of milestones have been passed in the last few days. Most aren’t positive for the United States.
Nouriel Roubini is no longer the only economist putting the eventual toll of the financial crisis at close to a trillion dollars.
It takes about $100 to buy a barrel of oil that could have been bought for about $20 a few years back.
It takes $1.50 (a bit more actually) to buy a currency that could have been bought for 80 or 90 cents six years ago.
George W. Bush efforts to push the Gulf to democraticize aren’t going anywhere. In some sense they cannot go far when Ben Bernanke is encouraging US financial institutions to look to non-democratic governments for additional capital.
The US financial system no longer seems like a model for the rest of the world. Apparently SIVS are only one category of potentially troublesome off-balance sheet conduits. Read Dr. Feldstein’s important oped. US banks and broker-dealers rather clearly lacked sufficient capital to sustain the risks they were taking.
The absence of lending by US and European banks has led private equity firms to encourage some of their large investors to lend them money directly. It isn’t, though, clear to me what ADIA gains financially by lending to a firm that it already likely managing ADIA’s money. Any gains on the debt will come out of its equity returns.
There is an overarching logic that ties these developments together. A weak US financial system needs low rates and time. Low rates contribute to a weak dollar. A weak dollar - especially in a still-sort-of-strong global economy - contributes to higher commodity prices, at least in dollar-terms. Or high commodity prices contribute to a weak dollar. No one is quite sure. High oil means the big Gulf funds have more money. It also means American consumers have less money - and either have to consume less or save less. Gulf “liquidity” substitutes for US liquidity. Pressure on the dollar means more exchange rate intervention in Asia. China is once again cracking down on hot money inflows. Rising reserves and faster RMB appreciation create pressure for China to seek higher returns, and either to expand the CIC or let SAFE invest more aggressively.
But rather than launching into (yet) another lengthy post on sovereign wealth funds, let me just highlight two excellent articles on sovereign funds - the William Mellor and Le-Min Lim’s Bloomberg feature on the challenges facing the CIC and Landon Thomas’ New York Times profile of ADIA.
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Posted in emerging economies | 34 Comments »
Posted on Thursday, January 10th, 2008
By bsetser
Shanghai, Mumbai, Dubai doesn’t really quite work. The CIC is in Beijing, not Shanghai. Singapore has committed more funds to troubled banks than Mumbai. Abu Dhabi, Saudi Arabia and Kuwait have a lot more cash than glitzy Dubai.
But Andrew Ross Sorkin’s alliterative phrase captures a deeper truth.
A group of banks that previously had advised most US companies that they had too much equity and too little debt have found themselves short on equity.
And a group of banks that in the non-so-distant past argued that state ownership was a barrier to development are now themselves partially state-owned.
The most money the IMF ever lent to the emerging world in a quarter?
$13.7b - in the third quarter of 2001 (Turkey and Argentina … )
That is just a bit more than the $13.4b lent out in the fourth quarter of 1997 (Asia). The IMF also lent out $10.9b in the second quarter of 2002 (Brazil) and $9.6b in q3 1998 (Russia and Brazil). And yes, two of the four biggest quarters for IMF lending came under the Bush administration’s watch. Foreign policy concerns trumped market fundamentalism.
Capital infusions from emerging market governments to US and European banks smarting from losses on US mortgages in q4? $28.4b, by my count.
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Posted in emerging economies | 33 Comments »
Posted on Tuesday, December 11th, 2007
By bsetser
Sovereign wealth funds are hot. A senior JP Morgan Chase banker, quoted in Time:
"SWFs … are the new 'it' girl of global finance. Everyone wants a piece of them."
Almost every investment bank is looking to sovereign wealth funds as a new source for of deals and management fees — if not for a bit of emergency funding to shore up their existing capital base. Central banks — which tend to try to minimize the fees they pay on investments in safe assets — haven't generated half as much as much excitement.
The research arms of the world's investment banks have quickly reached a consensus that sovereign wealth funds will get big fast, providing long-term support for at least some risky assets (Merrill's analysis is typical)
Sovereign wealth funds manage at least $2 trillion now, and perhaps a bit more. We don't know because the biggest fund also happens to be the most secretive. Estimates of ADIA's size are all over the map — I personally doubt ADIA has $875b (more on that later). Plus the dividing line between central bank reserves and a sovereign wealth fund can be rather thin: Russia's oil stabilization fund and the non-reserve assets of the Saudi Monetary Agency are often counted as sovereign wealth funds even though they have fairly conservative portfolios. The Saudis have some equities, but far less than most investment funds. Russia's oil stabilization fund is managed far more conservatively than say Switzerland's reserves!
But even if sovereign wealth funds will end 2007 managing a sum that is closer to $3 trillion than $2 trillion, they won't grow to $8 trillion by 2011 — as Merrill now estimates ("By 2011, assets under management at SWFs worldwide are projected to grow almost fourfold to nearly $8 trillion")– without getting close to a trillion a year in new assets to manage.
Such an increase isn't entirely implausible. Central banks are on track to add at least $1 trillion to their reserves this year, and perhaps substantially more. Sovereign wealth funds will likely be given an additional $150-250b to manage this year, depending on whether China's Finance Ministry uses the funds it raised from its big bond sale to buy an additional $100b of foreign exchange from the PBoC for the China Investment Company in late 2007 or early 2008.
If the emerging world's governments continue to accumulate foreign exchange at their current rate and a large share of their burgeoning foreign assets is managed by investment funds that pay juicy investment banking fees and relatively little is managed by cost-conscious central banks, Merrill's forecast isn't at all implausible.
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Posted in emerging economies | 60 Comments »
Posted on Thursday, December 6th, 2007
By bsetser
In James Clavell’s Noble House, there is a scene where a fictional Scottish trading house operating in colonial Hong Kong ends either a run on its bank or a run on its stock (or maybe both – I forget) by obtaining an emergency loan from China’s communist government. The loan didn’t come directly from China’s government – it came though the Hong Kong branch of Bank of China – but it clearly required Beijing’s approval.
Clavell's novel was set in a time when China’s government was still really communist. 1949 wasn’t a distant memory in the 1960s.
The world has changed since then. Chinese Communist have turned into capitalists. And fiction has turned into fact.
Last week, a capitalist icon turned to government – and not its home government — for help in a time of stress. About two weeks ago Citi's top executives boarded a private plane to fly half-way around the world to cement the sale of a decent chunk of Citi's equity to the Abu Dhabi Investment Authority (ADIA).
Depending on your point of view, Citi’s recapitalization is structured so that ADIA either gets a generous coupon before it is obligated to buy Citi's stock, or the generous coupon is a way of disguising the discounted future sale price of Citi’s stock. See ALEA for the real details (hat tip Naked Capitalism).
ADIA’s investment is structured to stay below the 5% threshold that requires Fed approval (for a bank), let alone the 10% threshold that requires CFIUS (Committee on Foreign Investment in the United States) review. Still, it is hard to believe that Citi’s new CEO won’t pay a visit to ADIA along with Prince Alaweed soon after being selected. He (or she) might even get flown over in a private A380 rather than Citi’s corporate jet …
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Posted in emerging economies | 50 Comments »
Posted on Tuesday, October 23rd, 2007
By bsetser
The FT notes, in today’s leader, that the G-7 hasn’t been able to agree on the massive, co-ordinated intervention needed up hold the dollar up against the euro.
The euro, and commodity currencies such as the Australian dollar, are bearing the brunt of the dollar’s fall and the erosion of their trade competitiveness. These are the nations with something to gain from G7 or IMF management of the dollar’s fall, but even if they could agree amongst themselves, it is unlikely they could muster support for the massive, co-ordinated, global intervention that would be needed to hold the dollar up.
The funny thing is that the emerging world has been able to muster support for massive, global intervention needed to hold the dollar up – the IMF estimates that global reserve growth is set to top $1 trillion in 2007, and judging from the first two quarters, that may be an underesimtate.
And even more surprisingly, they have managed to do this without any formal coordination. There is no real analogue today to the G-7 of the 1980s (see HSBC’s Stephen King in yesterday’s Independent). The big emerging economies don’t sit down with the US in the G-20, for example, and agree to intervene to hold the dollar up while the US takes steps to put its financial house in order. But they nonetheless intervene on a far larger scale – both relative to US GDP and their own GDP – than the G-7 ever did in the 1980s.
So how can this system be sustained in the absence of formal coordination? After all, Barry Eichengreen argued back in 2004 than every individual country in the dollar financing cartel had an incentive to cut back on its dollar holdings before others do– and as a result, the Asian central bank cartel financing the US would prove to be unstable.
I would point to two things.
First, so long as China resists allowing its currency to appreciate – a policy that requires that China buy tons of dollars in the foreign exchange market and invest tons of money in the US – any emerging economy that allows its currency to appreciate against the dollar also allows its currency to appreciate against the RMB. That has a real cost. Ask India. Or Thailand. Those emerging Asian economies that have allowed their currency to appreciate now generally run current account deficits, not surpluses – and many are seeing a very rapid rise in their imports from China. As a result, even countries with higher upfront sterilization costs than China are still intervening to resist pressure for their currencies to appreciate. Ask the Reserve Bank of India how many dollars it has bought over the last month. And then ask the Bank of Thailand.
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Posted in emerging economies | 62 Comments »
Posted on Thursday, October 18th, 2007
By bsetser
I am a bit of a balance of payments data geek. I like to read the IMF's WEO from the back to the front. The data in the statistical appendix often tells interesting stories.
Here are three that jumped out at me.
A savings glut not an investment drought.
Global savings is estimated to be close to 23.6% of world GDP in 2007, up from around 21% in the 2001-2003 – and above the 22% average between 1993-2000. Investment is up to, but with real rates low globally, the rise in investment likely reflects a rise in savings – i.e. a glut that has driven real rates down.
Certainly there is a “glut” of savings in developing Asia – a group that includes China. Savings is estimated to be 45% of developing Asia’s GDP – up 12% from its 1993-2000 average. Investment is up too – at 38% of GDP in 2007, it is estimated to be about 5% higher than its 1993-2000 average. But even with higher investment, developing Asia is in a position to lend a lot more to the rest of the world – 7% of its GDP in 2007, v. next to nothing from 1993-2000. I tend to side more with Dr. Wolf than Dr. Roubini on this question. I don’t think the US deficit is entirely the product of US policies (the US has brought it fiscal deficit down from its 2004 peak, though it is once again starting to rise). It also has has been induced by the rise in China’s surplus. Indeed, right now the rise in China’s surplus seems to be inducing deficits in Europe as well as the US.
Continues
There is also a savings glut in the Middle East. Savings, at an estimated 44% of GDP in 2007 – is up about 20% from its 1993-2000 average. Investment is up about 4%, not nearly enough to offset the rise in savings. The dynamics here aren’t hard to understand. Oil has soared. Domestic spending and investment are growing rapidly – but not as fast as oil is rising. Here I think the US should be looking a bit more in the mirror. The US cannot do anything – apart from imposing countervailing tariffs – to get China to stop pegging to the dollar, or to adopt policies that would lower its national savings rate. But the US certainly could adopt policies to reduce the United States call on global oil supplies. The US remains a very energy-inefficient economy.
State-led financial globalization
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Posted in emerging economies | 102 Comments »
Posted on Monday, September 24th, 2007
By bsetser
michael pettis
The Chinese sovereign wealth fund (which, following convention I will call the CIC) is expected to be approved later this month or early October, before the October 15 meeting of the 17th National People’s Congress. Much of its expected structure, however, is known and it has already made one very big and visible investment, the $3 billion it invested in the Blackstone Group IPO, which value began falling almost as soon as the deal was launched. As of last week the market value of the investment had declined by $600 million, causing a great deal of complaints and criticism in China, not all of it rational.
The CIC has already been approved to purchase $200 billion from China’s central bank, the People’s Bank of China (PBoC). The purchase will be funded by a RMB 1.55 trillion bond offering by the Ministry of Finance (MoF) with maturities of ten years or more. Already about one-third of the money (RMB600 billion) has been raised, with all of the rest expected to come before the end of the year. Given that China is accumulating reserves at the rate of $100-120 billion a quarter, it is probably safe to assume that if it is perceived as being successful (from the point of view of domestic political considerations, not investment performance) a lot more money will eventually be transferred into the CIC.
One bit of good news is that the PBoC plans to use these MoF bonds as part of its open market operations to control the expansion of the domestic money supply. This is good news to me because I think the use of central bank bills, which is what the PBoC mainly has used in its ineffective sterilization attempts, has been pretty much a waste of time. They are too similar to money and way too liquid to have much impact in draining China’s ocean of liquidity. The less liquid MoF bonds should do a better job.
Interestingly enough, the loss on the Blackstone IPO and the recent turmoil in the markets seems to have affected the CIC's investment strategy, as has the international outcry against non-transparent SWF's purchasing major strategic assets around the world. During their meeting with German Chancellor Merkel's during her visit to China at the end of August, Chinese officials promised that the CIC had no intention of buying strategic stakes in big western companies. In fact it seems that the original goal of the CIC – to maximize investment returns – has been put on hold. This is probably a good thing because, it seems to me, the most valuable use of excess reserves is as a sort of stabilization fund that minimizes the changes in creditworthiness of the sovereign borrower. Instead of maximizing returns – which is likely to be pro-cyclical and so will only increase volatility – the funds should be invested in ways that hedge Chinese risk, for example, by buying assets that perform best when conditions in China are likely to be at their worst, and vice versa.
Unfortunately that doesn't seem to be the alternative strategy. It looks like the management of the CIC's investments, perhaps not surprisingly given the size of the honey pot, is going to be the result of a hodgepodge of competing ministries and claims. This is what Xinxin Li has to say about it (see the September 20 entry for my blog at piaohaoreport.sampasite.com for a more complete excerpt):
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Posted in China, central bank reserves, emerging economies | 41 Comments »
