No. Not really. At least not in the sense that is usually argued. China has no need to sell foreign assets like Treasuries to finance its domestic fiscal stimulus so long as it is running a large external surplus.
But China could use a large buyer for some of its Agencies. Now it was one. Though here the Fed isn’t so much bailing China out as substituting for the falloff in Chinese and other central band demand.
China’s customs agency said Wednesday that merchandise exports in February plunged 25.7% from a year earlier. That is one of the biggest drops on record, and extends the 17.5% fall in January for a fourth straight monthly decline. Imports declined by a slightly less dramatic 24.1%, thanks in part to government spending, which other data also issued Wednesday showed picking up in February. That left a monthly trade surplus of $4.84 billion – the smallest in three years. The number was just a fraction of January’s $39.11 billion, reversing a string of record surpluses in recent months.
But looking at the February data in isolation is always risky. As Macroman notes, the timing of China’s new year celebrations has a large impact on the y/y data. To avoid this, look at the combined data for January and February.
Late on Friday, the US Treasury released the preliminary results of its annual survey of foreign portfolio investment in the US. That always makes for an interesting weekend.
The survey offers the best picture of the impact large central banks and sovereign funds have had on global financial markets. It just comes out with a long lag. And as I will argue later, it is, for all its virtues, it still paints an incomplete picture of the activities of official investors.
But it still reveals a few secrets, not the least about China.
This is Brad Setser once again. Thanks to both Rachel Ziemba and Paul Swartz for filling in for me last week. I rather enjoyed not having to write a post every day …
China has now released data on the PBoC’s other foreign assets (what I have called China’s hidden reserves) for December. The US TIC data for December is now out at as well. The two together permit us to paint a reasonably comprehensive picture of Chinese demand for US financial assets in 2008. This post updates the estimates of China’s true demand for US assets laid out in my paper with Arpana Pandey.* It consequently touches on the central subject of Geoff Dyer’s FT analysis piece, namely the scale of China’s holdings of US assets and China’s willingness to continue to add to its US portfolio.
The sharp fall in China’s exports (down 17.5% y/y) and imports (down 43% y/y) shouldn’t have been a complete surprise. Korean and Taiwanese exports are down far more than China’s exports, in large part because of sharp falls in their exports to China. And, given the intra-Asian supply chain, that has long augered bad news for China.
Dr. Mankiw labels complaints about China’s practice of intervening in the market to hold its currency down protectionist.
But Mankiw isn’t defending a world where governments do not intervene to shape trade flows.
An undervalued exchange rate acts as a subsidy for that country’s exports – and it also protects its domestic producers from competition from imports. Ask Dr. Bernanke. Dr. Subramanian of the Peterson Institute writes: “An undervalued exchange rate is in effect a combination of export subsidies and import tariffs.”
During the good times, both exports and investment boomed. Indeed, the fact that China ran a large current account surplus even as Chinese domestic investment soared — something only possible because of a large increase in China’s national savings rate — was one of the global economy’s core puzzles. Investment booms generally lead to current account deficits (setting aside investment booms financed by spare petrodollars) not large surpluses.
China has $1946 billion in reserves. The PBoC had another $185 billion in “other foreign assets” at the end of November. Given the fall in China’s reserve requirement, now likely has maybe $160 billion and perhaps less. The PBoC therefore already manages a portfolio in excess of two trillion dollars. The CIC has around $90 billion (less if it marks to market) – as it spent $67 billion acquiring Huijin (China’s existing bank recapitalization vehicle), $20 billion recapitalizing the CDB, $3 billion of China Everbright and $19 billion on ABC. The state banks have at least another $100 billion in foreign assets. Sum it all up and the foreign portfolio of China’s government is north of $2.3 trillion.
Dean, Areddy and Ng key their story off Wen’s criticism of US economic management. But it is really much more about the political fallout inside China from China’s losses on investments that they considered safe.
The story breaks a lot of new ground. It highlights how China’s losses on Reserve Primary, Lehman, Morgan Stanley and WaMu influenced China’s decision-making It also confirms that China was very very nervous about its Agency exposure.