EconoMonitor

RGE Analysts

The debate over the pace of hot money flows into China

Are hot money inflows to China falling? Or rising?

Are hot money flows a constraint on the PBoC’s ability to raise domestic Chinese interest rates to try to curb inflation, or not?

And, more broadly, can China sustain a gradual pace of RMB appreciation? Or even a a gradual pace of appreciation against basket, not just the dollar, as Li Yang has suggested? Or does an expected , gradual appreciation invite unlimited inflows and thus pose impossible-to-solve problems for a “stretched” central bank, leaving only one way out — a large one-off revaluation?

These are all big questions. And the leading analysts at major banks do not agree on the answers.

Morgan Stanley’s Stephen Jen thinks hot money inflows are picking up. He wrote on Monday:

.. just look at how much capital flowed into China last year (US$200 billion), over and above the large trade surplus (US$260 billion). Much of the former was a result of the expectation of CNY appreciation. I believe that these inflows have accelerated since November, when Beijing moved USD/CNY into overdrive

Jon Anderson of UBS thinks hot money inflows remain contained — and have actually fallen off their pace of earlier this year. Anderson in a recent report, as quoted by Michael Pettis:

Another very common argument is that can’t successfully pursue a gradual renminbi strategy, since letting the currency appreciate by 8% to 10% per year would bring in a flood of speculative capital and overwhelm the PBC’s ability to control the money supply. And in the first half of 2007, it seemed that this was precisely the case: “hot” money was visibly returning to the mainland once again in large amounts, and the central bank was forced to slow down the pace of exchange rate appreciation so as not to encourage further speculation.

However, over the past six months those pressures have faded. As it turns out, the main driver of capital inflows was not exchange rate expectations but rather the booming equity and property markets.

FX reserve pressures have been fading over the past six months following the “scare” in the first half of 2007, when inflows jumped sharply. The trade surplus was essentially flat through all of last year on a seasonally adjusted basis and could actually begin to decline in 2008, and … the strong portfolio capital inflows of a few quarters ago seem to be drying up as domestic equity and property markets fall.

On this question, I tend to support Dr. Jen.

Looking just at the reserves data is — at Micheal Pettis notes — potentially misleading: China’s state banks seem to have accumulated a lot of foreign exchange in the second half of 2007, lowering reported reserve growth. The banks were — according to SAFE — allowed to meet their reserve requirement by holding dollars. But supposedly the big state banks were called and encouraged to meet their reserve requirement by holding dollars.

The sum involved is quite large.

Logan Wright of Stone and McCarthy thinks that the big state banks could have been encouraged to stash away up to $100b in the second half of 2007. Stephen Green of Standard Chartered has noted that an obscure line in the PBoC’s balance sheet — other foreign assets — increased by over $75b in 2007, mostly at the end of the year. He thinks this corresponds to the rise in the banks fx holdings. That particular line had been stable up until recently.

Add those sums to China’s reserve growth and the picture changes.

Hot money flows are usually defined as the gap between the sum of China’s trade surplus, the interest income on its reserves and known FDI inflows and China’s reserve growth.

However, if the banks are adding to their foreign exchange holdings at the request of the central bank, that holds down reserve growth. The foreign exchange the Ministry of Finance purchases from the PBoC to finance the CIC also holds down reserve growth.

Much of the debate, consequently, hinges on the scale of these efforts. Consider the following two graphs — which have been slightly updated from the graphs in my January paper on China’s reserve growth.

The first shows underlying trade,income and FDI flows v various measures of reserve growth. The size of hot money flows can be inferred from the size of the gap between the shaded area and the various lines showing reserve growth.

china_hot_money_1.jpg

The second makes the hot money flows implied by the various measures of reserve growth in the first graph explicit. The orange line shows the hot money flows implied by China’s reported reserves, the red line shows the hot money flows implied by China’s reported reserves plus the rise in the banks “other fx liabilities” and “purchases and sales of foreign exchange” (balance sheet items that I think correspond with funds shifted from the PBoC to the banks, as explained my paper) and the yellow and red line shows hot money flows if the rise in the banks fx reserves estimated by Logan Wright is added to the adjusted reserves total.

china_hot_money_2.jpg

To be clear, I do not know which is the right number. There is real risk that adding the assumed rise in bank fx holdings corresponding to the rise in required reserves to the “adjusted” total may end over-counting the increase in the Chinese state banks’ foreign exchange holdings.

Ubernerd points – with apologies to uber-housing crisis blogger Tanta of Calculated Risk.

In a recent paper (sorry, no link available), Stephen Green of Standard Chartered highlighted an unusual roughly $80b ($78.6b, at year-end exchange rates) rise in the PBoC’s other foreign assets, a rise that came at the end of 2007. It isn’t totally clear to be why a rise in the banks fx holdings should lead to a rise in the PBoC’s foreign assets, but this is China, so you never quite know. The timing of the rise in this line item matches the timing of the reported change in China’s reserve policy that led the banks to meet their reserve requirement with fx.

Green links this to changes on the liabilities side of the state banks foreign currency balance sheet — notably a $100b rise in “purchases and sales of foreign exchange” in the second half of 2007. The link would make sense if the banks are hedging the rise in their fx holdings with the central bank, as some press reports suggest.

However, the line item hasn’t been stable either: liabilities from the “purchase and sale of foreign exchange” fell by $45b in the first half of 2007, back when China’s reserve growth was surprisingly large. So the total increase in the banks fx liabilities from purchases and sales in 2007 is only around $55b.

Moreover, another line item in the banks foreign currency balance sheet — “other fx liabilities” — seems to move with purchases and sales. It rose by $54b in the fist half (offsetting most of the fall in outstanding liabilities from purchases and sales of fx) and then fell by $57b in the second half of 2007
. In the past, I thought the two moved together because the liabilities from “purchases and sales” stem from swap contracts that hedge the banks underlying fx exposure from the recapitalization, but that is just a guess.

Basically, we know that in 2007, other foreign assets of the central bank rose by $75-80b (depending on the exchange rate conversion), banking system liabilities from “purchases and sales of foreign exchange” rose by about $55b (with a big fall in the first part of the year and a big rise in the second part of the year) and other foreign currency liabilities fell by a bit over $3b.

We don’t yet know how all these changes relate to each other. A lot of variables are moving, and China hasn’t really clarified how they all add up.

End ubernerd balance sheet points

Bottom line: it seems likely that the banks foreign exchange holdings stopped increasing in the first part of 2007, and then rose rapidly in the second half of 2007.

That in turn influenced reported reserve growth, and thus the implied pattern of hot money flows

On balance I think the evidence suggests that hot money inflows haven’t fallen off but rather that some of the rise in reserves has been shunted into the banks. It is true, as Dr. Anderson argues that the equity boom is no longer pulling in funds. However, a faster pace of RMB appreciation — combined with falling rates in the US — offers another good reason to move money into China.

It certainly seems to have made it hard to convince private Chinese investors to move money out of China. Even Hong Kong has lost its allure.

That matters. As Henny Sender noted in the FT, right now China’s government has an effective monopoly on capital outflows from China. And rising Chinese government investment in other economies makes many countries’ governments — not just the US government — nervous.

 

43 Responses to “The debate over the pace of hot money flows into China”

TwofishFebruary 20th, 2008 at 10:14 pm

On the other hand the dollar reserve requirement could be a red herring. Letting banks meet their reserve requirements with dollars doesn’t necessarily mean that the banks are increasing their dollar holdings.

bsetserFebruary 20th, 2008 at 11:00 pm

Tis possible, but I suspect unlikely. There was general agreement in Beijing in november that the banks were holding a lot more fx. And a Dow Jones reporter got a Shanghai banker on the record to the effect that the state banks were directly asked to hold more fx.

There is enough smoke to suspect a fire.

bsetserFebruary 20th, 2008 at 11:00 pm

Tis possible, but I suspect unlikely. There was general agreement in Beijing in november that the banks were holding a lot more fx. And a Dow Jones reporter got a Shanghai banker on the record to the effect that the state banks were directly asked to hold more fx.

There is enough smoke to suspect a fire.

Michael PettisFebruary 20th, 2008 at 11:21 pm

Brad, here is an excerpt from an article from today’s Bloomberg:

Yuan Declines on Speculation China Seeking to Deter Speculators
Feb. 21 (Bloomberg) — The yuan fell, snapping a five-day gain, on speculation China is seeking to deter speculators betting on faster gains in the currency. The central bank set a weaker foreign-exchange reference rate for trading, making it the only loser of the 10 most-active Asian currencies today outside of Japan. The People’s Bank of China pledged to boost the currency’s flexibility in a five-year plan released this week. China may “flush out speculators from time to time, before allowing the yuan to appreciate again,” said Nizam Idris, a currency strategist with UBS AG in Singapore.

This is the second time in recent weeks the PBoC has suddenly reversed RMB appreciation, supposedly to “flush” out speculators. They have been doing this regularly in the past few months.

Leaving aside the usefulness of their actions (if everyone knows the RMB is headed up, why should a small one- or two-day reversal worry anyone?), I would wonder why the PBoC is bothering with all this if they didn’t believe there were significant hot money inflows. One could argue that they are trying to teach Chinese corporations about currency volatility so as to prepare them for the brave new world, but since purchase and sale contracts are usually priced forward, I doubt it would have much impact. This seems to be aimed at speculative inflows. If the PBoC thinks speculative inflows are a problem, should any of us disagree?

Dave ChiangFebruary 21st, 2008 at 6:35 am

From friends and relatives in China, from what I hear, no one wants to hold the US Dollar anymore due to devaluation risk. As soon as anyone is wired US Dollars, ordinary people go about immediately exchanging the US Dollar into yuan at state-owned banks. Where in the past you could get a slighly better exchange rate, the blackmarket currency exchangers won’t even accept US Dollars anymore. The China PBoC can attempt to flush out speculators, but it isn’t going to work because sentiment towards the US Dollar has dramatically changed from a few years ago.

For Americans interested in hedging their US Dollars in Chinese assets, E-trade now allows its account holders to directly trade on the Hong Kong stock exchange. Your US Dollars are automatically exchanged at the current exchange rate for Chinese equity shares. While there are a few ADR shares of Chinese companies listed in New York, everything from China Oil Field Services to Tsingtao beer is listed in Hong Kong. Now even small investors can hedge against the Bernanke Fed’s trashing of the US Dollar.

bsetserFebruary 21st, 2008 at 7:48 am

Michael — Premier Wen’s statements in November, and indeed almost all the talk coming out of china’s authorities, also suggest ongoing pressure. There is a real debate though from what I gather inside the PBoC between those who believe that hot money flows preclude effective tightening through raising rates, and those who think positive real rates are essential. Concerns over the fallout of the subprime crisis/ the storms may have put that debate on hold, but if inflation continues to rise, it likely will come back.

AnonymousFebruary 21st, 2008 at 8:01 am

“Rio Tinto, the world’s second-largest iron ore producer, has indicated that it is not satisfied with the 65 percent increase in the benchmark ore price… Rio Tinto’s aggressive stance could put pressure on Chinese steel makers, which are major customers… “…Rio Tinto’s argument is that the steel mills are paying significantly less for Australian ore when it is priced at the Chinese port, and it wants a share of some of that saved money…” Freight is a significant factor in input prices, accounting for some 30 percent of the landed cost of Australian iron ore in China, and almost 50 percent of the cost of Brazilian iron ore…” http://www.nytimes.com/2008/02/21/business/worldbusiness/21ore.html?ref=business

Dave ChiangFebruary 21st, 2008 at 8:41 am

US Dollar hegemony and loose monetary policy
http://www.atimes.com/atimes/Global_Economy/JB21Dj04.html

Easy money has been one of the most tempting monetary fallacies for all governments all through civilization. It has brought down the mightiest of empires, from Rome to Dynastic China. But the one basic requirement for sustaining the value of money is that must not be easy to come by without equivalent input of value.

The US has been the privileged beneficiary of this easy fiat money fallacy through dollar hegemony since 1971 when President Nixon abandoned the Bretton Woods fixed exchange rate regime based on a gold-backed dollar. And this fallacy of the benefits of easy fiat money is about to be exposed by hard data for even the printer of the fiat dollar.

US dollar hegemony is objectionable not only because the dollar, as a fiat currency, usurps a role it does not deserve, thus distorting the effects of trade, but also because its impact on the world community is devoid of moral goodness, because it destroys the ability of sovereign governments beside the US to use sovereign credit to finance the development their domestic economies, and forces them to export to earn dollar reserves to maintain the exchange value of their own currencies. Exporting economies are forced to accumulate dollars that cannot be spent domestically without severe monetary penalty and must reinvest these dollars back into the dollar economy.

AnonymousFebruary 21st, 2008 at 8:45 am

Interesting article. A quick question: it is reported that the $1.53 trln figure is “China’s foreign exchange reserves”; this is not recorded as the PBoC’s net foreign asset position. How can you be so sure this figure does not include both PBoC foreign reserves as well as commercial bank’s net foreign currency (reserve) positions?

Dave ChiangFebruary 21st, 2008 at 8:50 am

http://www.atimes.com/atimes/Global_Economy/JB21Dj05.html
Under the past leadership of Alan Greenspan at the Fed and Robert Rubin at the Treasury, what dollar hegemony does over time is to feed the US debt bubble and steadily weaken the value of the dollar while it hollows out the US industrial core, as US policymakers in both the Clinton and Bush administrations tirelessly assert that a strong dollar is the national interest. Whenever the dollar debt bubble burst in the last two decades, as it again did in August 2007, the Fed was forced into the fad of a monetary easing mode, ie lowering dollar interest rates not just temporarily but keeping it low for long periods. The effect has been to force the purchasing power of the dollar to fall, which then induced other central banks to let their currencies fall as well to protect their competitive export market shares and to preserve the value of their dollar holdings in local currency terms. Dollar hegemony, though unavoidably presenting a long-term threat to the US-controlled international finance architecture, was as close to a free lunch in monetary economics as one can get.

bsetserFebruary 21st, 2008 at 8:52 am

if the commercial banks fx reserves were on deposit with the pboc, that should show up as a domestic liability and a foreign asset, and might be included in reserves. This was common in dollarized latin economies in the 90s — some of their reported reserves were the banks mandatory fx reserves (held against their fx deposits)

but my sense is that China has tried to move funds away from the central bank, not pull them in. the rise in banks fx (or the rise in outstanding swaps — which shift the fx to the banks to manage while allowing the banks to sell the fx back to the pboc at a fixed price and thus limit the banks fx risk) has tended to correspond with periods of slow reserve growth.

and clearly the fx shifted to the banks as part of the recapitalization doesn’t appear as fx on the pboc’s balance sheet.

so my strong sense is that the headline reserves number doesn’t include the banks fx position.

p.s. this argument is also consistent with the data in China’s Net int. investment position, which shows large holdings of foreign debt held outside the pboc (holdings that basically doubled in 06), and other reports (Goldman’s work on china’s banks for example) have indicated that a lot of this debt is held by the banks.

TwofishFebruary 21st, 2008 at 8:53 am

Pettis: Leaving aside the usefulness of their actions (if everyone knows the RMB is headed up, why should a small one- or two-day reversal worry anyone?)

Currency traders have extremely leveraged positions that close after a day or two so the possiblity that there could be a one or two day drop keeps them from making highly leveraged directional bets or keeping their positions open.

One other thing, one possibility is that the “mystery fx liabilities” are unhedged put options that the PBC had earlier given the banks, which are starting to be marked to market now that the currency is moving.

GuestFebruary 21st, 2008 at 10:11 am

“And this fallacy of the benefits of easy fiat money is about to be exposed by hard data for even the printer of the fiat dollar.”

What hard data ?

“Due to budgetary constraints, the Economic Indicators service will be discontinued effective March 1, 2008″
(http://www.economicindicators.gov)

Dave ChiangFebruary 21st, 2008 at 10:32 am

“Due to budgetary constraints, the Economic Indicators service will be discontinued effective March 1, 2008″

The US Department of Commerce (DOC) has decided to discontinue its economic indicators to hide the truth on the economy.

Un-manipulated CPI, GDP and employment statistics at
http://www.shadowstats.com

sshreksodus@gmail.comFebruary 21st, 2008 at 11:25 am

“From friends and relatives in China, from what I hear, no one wants to hold the US Dollar anymore due to devaluation risk. As soon as anyone is wired US Dollars, ordinary people go about immediately exchanging the US Dollar into yuan at state-owned banks”

Yea, but they dont want RMB either. Just look at the stock and real estate markets

LCFebruary 21st, 2008 at 11:30 am

So if hot money inflow is a problem, what’s your recommended solution? A one off jump in evaluation? Is so, how much? If not, how much faster does RMB need to appreciate to head off this problem? Any estimates?

GuestFebruary 21st, 2008 at 11:36 am

http://www.shadowstats.com/section/commentaries
But for systemic intervention and manipulations by the Federal Reserve, it appears we might be contemplating a collapsed U.S. banking system and a looming deflationary great depression that could have dwarfed the bad times of the 1930s. Such is the good news. The bad news is that with those same systemic interventions, the Fed is locking in a hyperinflationary great depression in the decade ahead, with the turmoil possibly breaking by 2010 or earlier.

bsetserFebruary 21st, 2008 at 11:59 am

This is a post about China’s data not US data; please keep comments on topic.

LC — a faster pace of appreciation just increases the incentive to move money into China. the classic solution is a one off move large enough to end expectations of further moves. Or, alternatively, the PBoC could keep Chinese rates below US rates to discourage inflows. I wouldn’t recommend the second option. And since the likely one-off move needed to change expectation is large, in practice China is relying on its capital controls … so in effect the debate over the scale of hot money inflows is a debate over their effectiveness.

AnonymousFebruary 21st, 2008 at 12:23 pm

“Or, alternatively, the PBoC could keep Chinese rates below US rates” – thereby increasing inflation and the cost of price controls?

GuestFebruary 21st, 2008 at 12:42 pm

http://www.guardian.co.uk/feedarticle?id=7326292
Bain Capital Partners and China’s Huawei Technologies Co Ltd’s [HWT.UL] failure to win U.S. national security approval for their $2.2 billion acquisition of U.S. network equipment maker 3Com Corp may deter Chinese companies from considering similar investments.

“I would characterise this as Congress sending a strong message to investors from China,” Grammas added. He said this could scare away Chinese investors from some deals. Huawei, China’s top telecoms equipment maker, would have owned as much as 21.5 percent of 3Com.

In the longer term, China may throw up tit-for-tat trade barriers if the United States repeatedly denies it the chance to make high-profile investments, China-based analysts say. “This all makes the U.S. much less attractive for foreign direct investment — and the ultimate cost is on the U.S.’s head,” he said.

bsetserFebruary 21st, 2008 at 12:45 pm

anonymous — yes, higher inflation (or more price controls) would be the likely consequence of a monetary easing meant to discourage inflows. China faces strong pressures in my view to appreciate in real terms, and if it doesn’t want nominal appreciation, well, there will be pressure on domestic prices.

TwofishFebruary 21st, 2008 at 12:49 pm

Anonymous: “Or, alternatively, the PBoC could keep Chinese rates below US rates” – thereby increasing inflation and the cost of price controls?

Yes. Currency adjustment could very well happen as inflation in China exceeds US inflation making the RMB less attractive.

TwofishFebruary 21st, 2008 at 12:57 pm

Guest: In the longer term, China may throw up tit-for-tat trade barriers if the United States repeatedly denies it the chance to make high-profile investments, China-based analysts say.

Doubtful. Most likely people will adapt to the rules and make investments in the US that are either low-profile or aren’t in sensitive industries. I really don’t see the PRC government too interested in a trade war over US investments.

PalljFebruary 21st, 2008 at 1:28 pm

I think you are right about one substantial correction looming rather than the gradual scenario. Regardless to how big the hot flow’s been of late. That just suggests more and more people are of the same opinion.

Spreading $ around the banking sector supports that view too, in my mind, making sure the jolt will be more shared among Chinese banks. The SWF activity, inevitable as it was or not, fits the pitcure as well.

So, there are basically two questions I´d love to know the answer to;
-namely, how much and when?

It must be a nerve racking responsibility to have, determining the how much part. Estimating all the repercussions etc, etc. More likely than not they´ll finally settle for “less than enough”.

The timing is even more interesting. Keeping in mind that we have an election year, and, coincidentally, what AIDS did to free sex happening in the banking sector, the timing will be very interesting indeed.

My gut guess is somewhere after 2007 annual report season, but before the next American president is inaugurated. 10%-ish. Before or after the election?

Dave ChiangFebruary 21st, 2008 at 1:49 pm

“I really don’t see the PRC government too interested in a trade war over US investments.”

Not a hot trade war but further restrictions on US investment in China. The State Council has already issued a directive that future foreign investment in Chinese corporations must contribute both technology and technical expertise, and not just more US Dollar capital. The Chinese economy has more than enough US Dollars to literally stack-up to the moon. There is little value added to the Chinese economy to accumulate more fiat US Dollars.

The rest of the world is increasingly unwilling to continue to accumulate dollars; the US will soon not be able to finance its trade deficit or its budget deficit. As both are seriously out of balance, the implication is for yet more decline in the US dollar’s exchange value and a sharp inflation rise.

bsetserFebruary 21st, 2008 at 2:15 pm

A clamp-down on inward investment is over-determined. Remember, China has been less keen on garden variety FDI recently, simply b/c it doesn’t need the money and FDI inflows are a bit like hot money inflows in their macro impact. They increase reserves and thus increase sterilization. And the same forces that led to the creation of a sWF are also pushing china to redress the imbalance between the scale of inward FDI in China (large) and the scale of outward FDI.

Conversely, unless China lets its currency appreciate/ otherwise reduces the current account surplus (and unless capital inflows fall) china will have to continue to invest abroad. Note that CNOOC/ Unocal didn’t lead to a fall in Chinese demand for us assets.

AnonymousFebruary 21st, 2008 at 4:00 pm

more interested in how different scenarios affect its’ demand for different types of assets

realizing that china is not Zimbabwe, but which pocket pays for china’s price controls – and how might China’s huge dependency on commodities play into the ways it may be affected by a) a large one-off revaluation, or b) more of the same.

given some g7 and other significant developing country currency moves just over the past year, how could 10% be referred to as a ‘large’ revaluation?

GuestFebruary 21st, 2008 at 4:49 pm

A modest proposal: Chinese eat a lot of pork and the price has gone up and many find it difficult to afford. The US produces lots of pork. Why can’t the Chinese government use some of its “excessive” hoard of dollars to purchase large amounts of pork from the US and resell it at lower prices to the population? It would help ally discontent. Chinese pork producers could also be compensated in some way. (Yes, I own shares in Smithfield.)

AnonymousFebruary 21st, 2008 at 4:52 pm

Relatively tiny investment in Blackrock terms, so perhaps not an indication of any expectation of rmb reval but rather more to do with interest in a particular type of underlying asset – or relationship:

“On Monday, BlackRock opened its first representative office in Beijing and paired up with Bank of China, one of the big four state-controlled banks, to launch an asset management venture that has approval to start a Rmb10bn (€951.7m) stock-based fund…” http://www.financialnews-us.com/?contentid=2349848517&page=uspressdigest&m=2093FMzQxNjQwOjI3NDYyNDoxNjQ3NQ%3D%3D

but it brings me back to my question, and sorry i’m so dense about this, but how much of the $100 trillion ‘US assets’ – presumably assets really owned, meaning also controlled, not just influenced, by u.s. citizens and entities – may be ‘in china’, or other nations, priced in local currencies and how liquid those investments may be

AnonymousFebruary 21st, 2008 at 4:58 pm

re: pork

- of course at inflated prices that allow north american pork producers to make decent profits while hopefully holding the line on food costs at home

“Maple Leaf Foods Inc. saw its losses grow in the fourth quarter due in part to soaring wheat prices, the strong Canadian currency, and restructuring charges, the Canadian meat processor and bakery said on Thursday…” http://www.reuters.com/article/marketsNews/idUSWNAS187220080221

PalljFebruary 21st, 2008 at 5:05 pm

Guest, I think the price of pork is very dependent upon the price of feed. It might be simpler for China to subsidize imported feed, wherever it came from…. but by all means, pay for it in dollars.

bsetserFebruary 21st, 2008 at 5:30 pm

$100 trillion seems high for US financial assets — US GDP is about $14 trillion, to that would be a fairly high ratio. But i haven’t checked the data.

US investment abroad is found in the US net international investment position data (on the BEA web page) — you can estimate the liquidity of various categories of investment. US holdings of Chinese portfolio securities can be found in the US survey of US portfolio investment abroad on the Treasury’s web site. US FDI abroad by country is found in the June or July issue of the survey of current business on the BEA’s web site. You will find that US holdings of Chinese assets are small –

US FDI in China is small relative to total FDI in China (most of the supply chain is Taiwanese/ Hong Kong owned) and US portfolio investment in China is also small.

remember, China has a closed capital account. that basically keeps out most portfolio flow. Getting money in is a lot easier for the Chinese diaspora than for a big fund manager.

AnonymousFebruary 21st, 2008 at 6:06 pm

assume assets held by Chinese-American – citizens – don’t know how non-citizen immigrants may be categorized – are part of the u.s. owners of the alleged $100 trillion and wouldn’t be surprised if that added up to a number that is much more significant than fund type investments…

ditto for other diaspora in the u.s.

GuestFebruary 21st, 2008 at 6:12 pm

Does China have limits on how much of a Chinese bank, say, a US bank can purchase? One way to discourage unwanted inflow and at the same time retaliate for US barriers to Chinese investment in companies here would be to put stringent limits on what US investors could do. Say they could purchase no more than 2.5% of a Chinese bank, and if they have more at present, force them to liquidate the excess. That would send an unmistakable message.

TwofishFebruary 21st, 2008 at 8:43 pm

Guest: Does China have limits on how much of a Chinese bank, say, a US bank can purchase?

Pretty much. The limit ranges from 5% to 25% depending on what the banking regulators think. There was one case in which a Chinese bank (Guangdong Development) was taken over by a US private equity firm, but that seems to be a one off experiment. The interesting thing about this was that the banking regulators at the time were really enthusiatic about the takeover since it gave them the ability to crack the whip against the other banks.

Guest: One way to discourage unwanted inflow and at the same time retaliate for US barriers to Chinese investment in companies here would be to put stringent limits on what US investors could do.

China really doesn’t have much in the way of country specific limits and the reason for that is that these don’t work well. Part of the problem is defining “US investor.” The money is coming in through a shell company in the British Virgin Islands or Hong Kong, and it’s difficult to tell who the ultimate owner of that money is.

Guest: Say they could purchase no more than 2.5% of a Chinese bank, and if they have more at present, force them to liquidate the excess. That would send an unmistakable message.

That the Chinese government are people that don’t keep their word. It’s one thing to set a limit before someone invests. It’s quite another thing to allow the investment and seize it later.

Besides, I really don’t see anything wrong with the US blocking the purchase of Huawei on national security grounds, and I don’t see any need or point in “retaliating.” The US just needs to figure out what the rules are, and Chinese companies can follow them. Next time, someone wants to buy a company, they’ll go for 9.9% rather than 16% to avoid a CFIUS review.

TwofishFebruary 21st, 2008 at 8:49 pm

DC: Not a hot trade war but further restrictions on US investment in China. The State Council has already issued a directive that future foreign investment in Chinese corporations must contribute both technology and technical expertise, and not just more US Dollar capital.

That was unconnected with the Huawei situation and was going to happen anyhow. Also, Chinese investment law doesn’t take into consideration where the money came from, just where it goes. It’s not as if because of US governmental action, Beijing is going to be nicer to German companies.

bsetserFebruary 21st, 2008 at 9:09 pm

anonymous – feel free to guess what fraction of the transfers/ other hot money flows going into china come from the chinese american community. I have absolutely no clue. basic ball park math says it likely is small relative to the total increase in China’s assets.

and do tell me where $100 t comes from — it is bigger than GEorge Houeget’s estimate of the size of global equities ($33t), gov bonds $21t and private sector bonds $24t — and that is a global total not just a US total. The US 1/2 that max. Houget is state street, so i suspect his data on that is good — and i just happened to have it handy.

bsetserFebruary 22nd, 2008 at 9:50 pm

i have a good clue about the scale of hot money flows v trade and fdi flows, and diaspora flows cannot be larger than hot money flows unless you think the trade data is mis-reported …

give me a bit of credit, i know how to basic balance of payments analysis.

and I’ll take Houget’s numbers over Wesbury’s. Frankly, if you like Wesbury’s analysis, this is the wrong site for you …

bsetserFebruary 23rd, 2008 at 9:20 am

anonymous (formerly guest) –

wesbury is the anti-roubini, a complete cheerleader. so his frames are always tilted in one direction. so you might say are mine — fair enough.

but as barry bitholz argued, the idea that “subprime only is $100b, such tiny drop in the bucket compared to the us financial system/ us economy that it cannot have much of an impact” has been proved false. Back when I was at the treasury, we worried alot about the systemic impact of sov, defaults, and the EM $ denominated bond market was something like $300b. It tho was connected to a host of other markets.

Houget’s numbers are traded financial assets. that leaves out a lot of other forms of wealth — including bank deposits, home equity, etc.

Wesbury’s numbers seem to be total US financial assets, including the market value of US housing stock (tho it is presumably worth less now than it once was). The number still seems high to me as it implies assets of almost 700% of GDP ($100t/$14t), but i haven’t ever looked at the underlying data. but it (from the defintion provided) includes a lot of illiquid untraded assets — including estimates of the value of small businesses and the like.

When it comes to assessing the impact of various shifts on traded markets, i prefer looking at flows to stocks, b/c price is set at the margin. A $500b influx of sWF equity into the market can be argued to be too small v the 100t (or a more realistic $30t number for traded market cap of equities and bonds) of financial wealth to have a difference, or it can be considered so large relative to the $150-200b in current foreign demand that is almost certainly will have an impact.

that is a real debate. but not one for here –

I franly don’t get your point of view — sometimes you argue that X is so small relative to the big market that it cannot have an impact.

but when it comes to your interests — illicit flows, diapora flows, etc — you reject my attempt to offer scale variables that suggest these flows are small relative to financial and net trade flows. and i usually offer flow to flow comparisons.

tho sometimes i offer stock to stock comparisons. have you taken up my suggestion to try to calculate total us exposure to China as measured by the US data (survey data for financial exposure, BEA data reported in the survey of current business for FDI investment)? I would be interested in the results — it shouldn’t take more than a couple of hours. and then maybe you might want to sum the transfers reported in China’s BoP data and estimate how much likely came from the US (and compare that to the data on the geography of US outward private transfer payments, including reported transders to East Asia — try the BEA site, http://www.bea.gov, the BoP data, interactive tables, transfers and the like. or the boP data by area. it wouldn’t take that long. Private transfers are remittances, so they would be the flows you are talking about –

my sense is that reported transfers to east asia are small, as most transfers go to latam. but i haven’t looked at the data recently. It might be interesting as well.

once you have done that, then you might be able to make a case that this is clearly too small and it undercounts real flows — including some more hot money flows that aren’t showing up in the transfers line in the bop. but then you would need to be able to estimate the share of hot money flows coming from the mainland money that moved offshore from 90 to 01, relative to flows from the US. and flows from HK, sing and Taiwan relative to the US. I would be interested in the techniques that you develop to be able to do this …

as you know, i have spent a fair amount of time developing techniques to estimate the undercounting of official flows by comparing debtor and creditor data. maybe you could do something similar with hot money flows.

WilsonFebruary 24th, 2008 at 1:33 pm

By rejecting 3Coms’ deal, it gives another reason for more people not want to hold US dollar. Why would I want to have a currency that I can’t buy things with?

Can someone advise what will happen if people do not want to buy US treasury anymore, and that they want their money back. I mean if the system of non-backed greenback collapses, what is the scenario?

What would need to happen for foreign governments not to want to hold US dent anymore.

These days more and more people suggests the US cannot pay back its foreign debt, but is this comment true? Any Statistics?

Many Thanks.

WilsonFebruary 24th, 2008 at 1:44 pm

To the one who posted ” The economy is fine(really)”

True that US housing is only 4.5% of GDP, but that does not include other economic activities associated with housing! From banking activities, to buying new furnitures etc from Wal-Mart or Staples etc.

Another note: 60% of America’s GDP is based on consumption. Part of that consumer consumption is based on credit. With the current affairs happening, would financial institutions only tigghten their consumer credit or loosen it?

With a negaive wealth happening due to housing price decline, would consumer spend more or less?

With tightened consumer credit going forward, would consumption(60% of the GDP) increae or decrease?

Please advise how the economy can be good going forward in the near term.

bsetserFebruary 24th, 2008 at 7:24 pm

wilson. if foreign governemnts didn’t want to hold us debt (or US $) then yields on us debt would rise and the price of the dollar would fall. and at some point private investors would conclude that us assets were a bargain and start to buy. a new equilibrium would be found.

tis true that the inability to convert $ into US equities (including 3com) could put a dent in foreign demand for US dollars. but after the US said no to the sale of unocal, China didn’t stop buying US $. it actually bought more in 07 than in 05, by a large margin.

that gives the us a bit of leverage. countries are buying the dollar b/c of their exchange rate regime, not b/c they like dollars or realistically expect to trade their $ for equities (in my view). if that view is right, they are stuck buying the assets the us wants to sell –

to change the equilibrium, countries now pegging to the dollar would need to move off the dollar — and that is something that they have resisted.

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