My Blog

April 11, 2008

The PBoC announced that total reserves as of the end of March were $1.68 trillion, for total growth of $153.9 billion during the first quarter (compared to $94.6 billion in the last quarter of 2007).  I think this is a record quarter, and there is a strong case to be made that the total amount would be about $22 billion higher except that commercial banks may have been asked to redenominate into dollars part of their January increase in minimum reserves – which has no impact on the money supply but does lower headline reserves.

The monthly breakdown, for those who care, is $61.6 billion in January, $57.3 billion in February, and $35.0 billion in March.  These are not official numbers, but they are based on usually reliable quotes from earlier this year.

As I noted in yesterday’s entry, the trade surplus accounted for $41.6 billion of that total while FDI accounted for another $27.4 billion.  That sums to $69 billion.  Roughly 30% of PBoC reserves are presumed to be held in currencies other than the US dollar, so the weakness in the dollar added to headline reserve growth – I am only guessing but my quick-and-dirty calculation suggests perhaps $30 billion or so.  Add another $15 billion to account for interest received on the securities held.  That takes us all the way up to $115 billion.  There is still nearly $40 billion that needs to be accounted for.  I am sure it is not all hot money, but it seems pretty obvious that the FDI numbers, and perhaps even part of the trade numbers, include speculative inflows.  There is a lot of money coming into China and even a global slowdown is not going to make the country’s monetary policy easier to manage.

Since I have to teach class in five minutes, I will postpone any further discussion, especially as I would like to talk to a few friends to see what else we can know about this number.  Needless to say this is a huge number, but I guess I am becoming a little numb to big numbers.  Of course this makes me all the more convinced that inflation is not going to peak as soon as most people in the market seem to believe – everyone I have been reading recently is arguing that inflation will peak in the next three months, and then drop in the second half of the year.  I not very confident that will happen.

Comments (5) for "Am I surprised by the bigges...

Is not the big news in this that the trade surplus is evaporating. That we are close to a tipping point, when the tide will turn. The engine at this moment is the Chinese consumer who is turning the world economy upside down. By Stefan, Tallinn - 4/10/2008 8:36 PM

Didn't they hike reserves in March as well? Wouldn't that add another $22 billion to "real" reserves (and maybe would help explain why March appears so low -- though the numbers in general don't smooth quite as much as one would expect, so there may be CIC fund transfers or fancy bookkeeping maneuvers or whatever mixed up in there). On a separate note, as a faithful reader of this blog, I am curious Michael why you think your site is blocked in China? This struck me as puzzling at first -- you're not advocating anything politically delicate. My own theory, after living here for a while, is that China is very sensitive about two categories of commentary: (1) What is deemed seditious or culturally offensive or in this vein (2) What is skeptical and at the same time very smart (which may be perceived as someone on the outside being privvy to "state secrets" or "sensitive state discussions"). In any event, if you have a slow day at some point, it might make a decent blog entry, if you don't feel such a subject is too narcissistic or you don't think it would further inflame the censors, whatever happens to be bothering them about a civil discussion of China money policy. By Chinawatcher - 4/11/2008 8:15 AM

Chinawatcher, actually it is not me being blocked so much as every blog on Sampasite. Apparently (I haven't confirmed this) one of the blogs on Sampasite is about Tibetan Buddhism, a very senstivie subject even before the recent events, and so all Sampasite blogs are blocked. This happens to a lot of blog sites unfortunately, so that many of the best blogs out there -- even those that are completely free of anything that might be deemed politically sensitive -- are blocked here. Needless to say this annoys the hell of a lot of people here, including many of my students. Stefan, my worst-case scenario is that we get an economic slowdown combined with rising prices and so slide into a "Chinese-style" stagflation (i.e. high growth but well under 10%, which is in my opinion sort of the baseline for stable unemployment levels), although it seems that domestic consumption growth may be keeping up with the slowdown in exports. You are probably right about the March reserve hike. See today's entry where I try to discuss this in further detail. By Michael Pettis - 4/11/2008 2:11 PM

Thanks for clarifying, Michael. Wasn't aware of that. Apologies then for my comment, which probably sounds a bit conspiracy-minded in hindsight. I've just wondered sometimes about the reach of the censors. I'm hoping that China eventually becomes strong enough and secure enough that -- even if it doesn't feel inclined to adopt the model of a Jeffersonian democracy, and there is no reason it should -- at least it becomes more tolerant of dissent and begins to nurture a more free exchange of ideas, which I think would unleash a new wave of creativity and growth. By Chinawatcher - 4/12/2008 9:25 PM

Thanks for clarifying, Michael. Wasn't aware of that. Apologies then for my comment, which probably sounds a bit conspiracy-minded in hindsight. I've just wondered sometimes about the reach of the censors. I'm hoping that China eventually becomes strong enough and secure enough that -- even if it doesn't feel inclined to adopt the model of a Jeffersonian democracy, and there is no reason it should -- at least it becomes more tolerant of dissent and begins to nurture a more free exchange of ideas, which I think would unleash a new wave of creativity and growth. By Chinawatcher - 4/12/2008 9:26 PM