Last week, the China Investment Corporation (CIC), China’s sovereign wealth fund, filed what seems to be its first ever 13-F disclosure with the U.S. Securities and Exchange Commission (SEC). The move is significant both from a financial disclosure perspective, showing as it does the CIC’s continued commitment to disclose information about its portfolio in line with other institutional investors (13-F’s are required of investment managers managing over US$100 million in assets, and report their U.S. long positions, including options and shares), but also because it allows a glimpse into a part of the Chinese government’s foreign asset portfolio. As RGE has noted in the past, how China allocates the approximately US$2.8 trillion in government managed foreign assets, will be important for several asset classes.
The World Economic Forum (WEF) released its annual Global risks report today. As always, it’s an interesting read. There’s actually a lot of continuity with risks highlighted in 2009, including fiscal crises, the risk of asset price falls (presumably if some the incipient bubbles burst), chronic diseases and the global governance gaps on dealing with long-term issues relating to the environment, health, development and financial regulation. With countries exiting recession at different speeds and focused on boosting their domestic growth, more friction on these issues and more delays are a risk. Moreover with the global crisis having been averted by concerted policy action, the willingness to act and coordinate and re-regulate has dissipated. Ian Bremmer and David Gordon highlighted this concern in the Eurasia group’s risks for 2010 report last week – noting that the divergences between U.S. and Chinese leaders would become even more pronounced in 2010, as the need to be seen to be cooperating has ebbed.
One by-product of the massive capital reallocation to emerging market economies, highlighted by RGE for some time, has been a sharp acceleration in foreign exchange reserves accumulation. Central banks, particularly in emerging market economies, have been adding reserves at the pace of an average US$250 billion per quarter since Q2 2009 as they sought to reduce the appreciation and volatility of their currencies. IMF data reported that the global reserve stock exceeded US$7.5 trillion in Q3 2009, well higher than aggregate pre-recession levels. October and November data suggest that Q4 looks to be more of the same story. At this pace (US$1 trillion annualized), reserve accumulation in excess of the deficits of the U.S. and other “overspenders”.
This week we turn our attention to the fallout from the debts of Dubai Inc that roiled global markets last week. Today’s note is excerpted from two pieces of analysis available in full to RGE clients: “Dubious Dubai: Castles in the Air, Heads in the Sand?” and “Rerisking after Dubai: The End of ‘Quasi-Sovereigns?’” Last […]
China showed few signs of credit tightening in Q3, despite a slowdown in lending growth from the torrid pace of the first half of 2009. Although new lending fell to RMB 517 billion in September from June’s record RMB 1.5 trillion, total loans outstanding still climbed 34.2% y/y, barely slower than the record set in […]
Despite worries of credit tightening, the most recent Chinese bank lending data still suggest relatively loose conditions that are supportive of growth – and asset bubbles. Total local currency lending is still on track to exceed RMB 10 trillion (US$1.47 trillion) in 2009, well above the initial RMB 8 trillion target and about 30% of […]
Today we present an abridged version of a new report examining China’s direct and indirect influences on global asset markets, and particularly equity, commodity and FX markets. The full version of the report is available to RGE Monitor premium subscribers. It takes a more in-depth look at Chinese commodity demand, the place of commodities within China’s foreign asset portfolio, as well as an update of our Chinese economic outlook. The full version also includes graphical analysis that should help readers parse recent trends in Chinese markets. Enjoy the preview!
U.S. officials and their counterparts from the country’s largest creditor, China, will take place next week in the latest of a summer full of key bilateral and multilateral meetings. In the run up to the G20 meeting in April, speculation about a “G2” consisting of the U.S. and China alone attracted a lot of attention, with many analysts noting that cooperation and compromise from the U.S. and China was needed for global progress on trade, climate change, global imbalances and a range of strategic issues. While a formal partnership between China and the U.S. along the lines of a G2 is unlikely, the two countries are expanding the topics on the agenda of their formal dialogue.
The first meeting of the a new bilateral dialogue, the Strategic and Economic Dialogue (S&ED) will be held next week in Washington, DC, bringing together both countries’ top economic and geostrategic leaders. What is on the agenda says a lot about the priorities of each government, but what’s not included may say more. As usual, the countries will focus on some of the areas on which they agree (short-term responses, big-picture ideas) with some thorny issues kept for the future. By formalizing these discussions, disagreements can be pushed through back channels, raising the prospect that some agreements may be reached before or as Obama visits Hu in China later this year. At the same time, one key goal of the S&ED under Obama is to make the dialogue less about deliverables and more about the ongoing contact between officials and their aides.
During the Bush administration, U.S. and Chinese economic officials met twice annually for the Strategic Economic Dialogue (SED) to discuss a range of issues. Initially, expectations for these meetings were high, though they faded over time. Secretary Paulson hoped to broaden the dialogue rather than fixate solely on the level of the RMB. The cooperation delivered some victories, including cooperation on food safety and small steps towards a bilateral investment treaty. The new grouping between the U.S. and China will meet annually and will take on a new set of issues – geostrategic as well as economic.
President Obama will address the meeting on Monday morning, before a session on cross-cutting issues commences. Climate change is expected to be the main topic of the first session, a move supported by the U.S. Senate Foreign Relations Committee. Climate change was an issue that was slightly out of the remit of the more economically-focused SED, but outcomes may be limited here given the diverging priorities . While both sides have agreed to a $15 billion joint-research project on clean coal earlier this month, progress on climate change may be limited.
After this, the strategic dialogue, to be led by Secretary of State Clinton and State Councilor Dai, will part ways from the economic dialogue, which will be led by Treasury Secretary Geithner and Vice Premier Wang. While there is broad agreement on many of the issues that will discussed in these meetings (such as China needs to boost consumption and the U.S. needs to save more), the mismatch in priorities on each side is likely to limit any substantial progress. Moreover, even if the U.S. and China are “roughly in agreement” over economic issues, as the Economist optimistically puts it, their accord stems from short-term and very long-term issues. China and the U.S. have engaged in some of the most aggressive economic stimulus policies since the global meltdown, but they may differ in their positions on exit strategies. Moreover, there is not too much agreement on how the two countries will navigate in a world where China consumes more and the U.S. becomes a bigger saver.
These days, the TIC data released monthly by the U.S. Treasury, detailing capital flows to and from the U.S., often seems anti-climactic given sharp moves in the FX and treasuries markets. Yet despite the lag, the data released yesterday, which details May purchases, tells a few stories.
Most importantly, it illustrates the fact that in the face of capital inflows to overheating emerging market economies, the central banks of these countries kept buying U.S. dollar assets in May. Q2 was the first quarter of significant reserve accumulation of the last year. Preliminary estimates from RGE Monitor suggest that reserve accumulation was around $180 billion in the quarter (adjusted for valuation); the first significant increase since mid 2008. As in 2008, China accounts for the bulk of the accumulation (around $140 billion).
Despite supra-national reserve currency rhetoric, and given Beijing’s reluctance to have its currency appreciate, there was little choice but to buy dollars. China added $38 billion in U.S. short and long-term treasuries for a net increase of $26 billion in U.S. short and long-term assets. The discrepancy can be explained by China’s reduction in its U.S. dollar deposits and its continued reduction in agency bond holdings.
Chinese reserves data released today seem to be one more sign that the Chinese stimulus might be working a bit too well. China’s reserves stood at $2.13 trillion up from $1.95 trillion at the end of March 2009. Although reserve accumulation was likely lower than the headline $178 billion, it implies that hot money is back in China. Adjusting for valuation, Chinese reserve growth was likely about $140 billion, much higher than the $60-70 billion of China’s trade surplus, FDI and interest income in this period. This accumulation also suggests that China continues to have a hard time diversifying its holdings away from the U.S. dollar.
Adjusting for valuation — the changes in value of the non-dollar holdings in China’s reserves — would imply reserve growth of around $135-140 billion. This accumulation rivals that of Q2 and Q3 2008 for the highest quarterly level.
It is one indicator that suggests that parts of China’s economy may be overheating as China tries all measures to stoke growth. It seems well in line with almost 40% y/y urban fixed investment in May 2009, and loan growth equivalent to 25% of 2008 GDP. However, it just underscores some of the difficulties in both stoking growth and avoiding future distortions.