There is a very widespread sense that the US “needs” China more now because it is issuing more Treasuries to finance its fiscal deficit. That isn’t quite true. As a result of the crisis, the US consumer has started to save and American businesses have reduced their investment, so the US “needs” to borrow a […]
Or perhaps a Sino-North Atlantic or Sino-Euramerican imbalance. Europe plays a supporting role in the drama. If oil averages $50 or so this year and $60 or so next year – and if intra-European surpluses and deficits are netted out – the world’s macroeconomic imbalances reduce to the United States external deficit (which the IMF […]
Economists scouring the globe for highs of hope (or at least a slower rate of decline) have found a few green shoots in China. A smaller fall in the March import data. A faster y/y rise in industrial production in March than in February. Signs of life in the housing market. The (undeniably) large increase in bank lending.
I would feel a bit more comfortable, though, if China’s trade data wasn’t tracking the US trade quite so closely. China exports a bit more than the US and imports a bit less, but they are basically comparable in size. And, well, the y/y change in a rolling 3m sum of China’s exports doesn’t look much different that the y/y change in US exports; and the y/y change in China’s imports doesn’t look much different than the y/y change in US imports.
Moreover, this isn’t the right time to force resolution of this issue.
China’s exports to world and US imports from China are both falling. Chinese reserve growth — read the amount of dollars China has to buy to keep its currency from appreciating — has fallen sharply. And perhaps most importantly, the RMB was one of the few emerging market currencies that appreciated during the crisis in real terms.
It is a good thing the US trade deficit has come down, because foreign demand for US financial assets — actually foreign demand for US assets other than short-term Treasury bills — has dried up.
Foreign investors bought $68 billion of T-bills in February. Russia alone (likely Russia’s central bank) bought close to $14 billion. Private investors — seemingly Japanese private investors — also bought $23.5b of longer-term Treasury notes. Otherwise, though, foreign investors didn’t buy much of anything. And Americans also didn’t buy many foreign assets.*
After Keith Bradsher’s New York Times article, though, all eyes are on China.
If China’s euros, pounds, yen and other non-dollar reserves were managed as a separate portfolio, China’s non-dollar portfolio would be bigger than the total reserves of all countries other than Japan. It would also, in my view, be bigger than the portfolio of the world’s largest sovereign fund. That is just one sign of how large China’s reserves really are.
Roughly a third ($650 billion) of China’s $1954 billion in reported foreign exchange reserves aren’t invested in dollar-denominated assets. That means, among other things, that a 5% move in the dollar one way or another can have a big impact on reported dollar value of China’s euros, yen, pound and other currencies. China’s headline reserves fell in January. But the euro also fell in January. After adjusting for changes in the dollar value of China’s non-dollar portfolio, I find that China’s reserve actually increased a bit in January. Indeed, after adjusting for changes in the valuation of China’s existing euros, pounds and yen, I estimate that China’s reserves increased by $40-45b in the first quarter.
The Wall Street Journal puts a positive gloss on China’s March trade data than I would. To me the overarching story is simple: the data paint a story of deep distress in both the Chinese and global economy.
China’s exports were growing 20% y/y (23% actually) in the third quarter of 2008. They were down nearly 20% (19.7%) in the first quarter of 2009.
Imports though fell by more, in part because of the fall in oil prices. Imports fell close to 30% y/y in the first quarter. That isn’t just a function of falling commodity prices and fewer imported components either; US exports to China — which presumably include a lot of capital goods — are way down y/y.
On Friday, Paul Krugman interpreted China’s call for a new reserve currency as a sign of weakness:
“But Mr. Zhou’s speech was actually an admission of weakness. In effect, he was saying that China had driven itself into a dollar trap, and that it can neither get itself out nor change the policies that put it in that trap in the first place.”
China is, according to Krugman, hoping for a magical solution that will “rescue China from the consequences of its own investment mistakes.” I agree.
China’s purchases of US Treasuries in 2008 (Setser/ Pandey estimate): $245 billion
US money market funds purchases of US Treasuries in 2008, from the flow of funds: just under $400 billion
China’s purchases of US Agencies in 2008 (Setser/ Pandey estimate): $38 billion. That reflects $85 billion in purchases through July, and $47 billion in sales since then …
I spend a lot of time tracking — or trying to track — what China is doing with its reserve portfolio. I consequently tend to interpret the public statement of China’s government through the lens of recent shifts in the composition of its reserves.
And to be honest, China’s recent rhetoric hasn’t tracked its portfolio, best that I can tell. SAFE clearly has increased its holdings of Treasuries over the past few months. China’s visible Treasury purchases have exceeded its reserve growth over the past few months. I am not sure of this is clear evidence that the dollar share of China’s portfolio is rising, as the shift towards short-term Treasuries may simply have increased the share of China’s reserves that show up cleanly in the US data. But it hardly suggests a shift out of the dollar.