My Blog

March 21, 2008

According to Market News International Chinese foreign exchange reserves hit $1.6471
trillion at the end of February.  This means that foreign exchange reserves rose by a surprising $57.3 billion over the month of February (actually I am lying – none of these numbers surprise me anymore).

In January reserves were up officially by nearly $62 billion, although there are strong reasons to believe that the headline number was understated by $22 billion – the amount of the hike in the minimum reserve requirement, which the banks were probably asked to redenominate in US dollars.  For the first two months of the year, then, reserves are up by $119 billion (and in terms of monetary impact they were probably up $141 billion), which far outpaces the already outlandish $40-50 billion monthly increase on average during the 2007.  

The trade surplus contributed $25 billion and FDI contributed $11 billion to reserve growth in January.  In February they contributed only $8.6 billion and $6.9 billion, respectively.  So even with sharply lower contributions from trade and FDI ($16 billion versus January’s $36 billion), reserve growth in February has been extremely high.  Let’s assume that valuation mark-ups and interest income added around $10 billion.  That still leaves us with over $30 billion to explain.  It can’t all be hot money, of course, but all the circumstantial evidence seems to suggest that hot money is accelerating.  No big surprise, perhaps, given the pace of RMB acceleration.

I am not sure what exactly is going on to account for all this inflow, but it seems that with reserve growth accelerating, and with it the monetary expansion that occurs as the PBoC is forced to buy the reserves, it is going to be almost impossible to rein in the overheating and inflation that plague the economy.  I am afraid that for all the talk and action, things are getting worse, not better.

If this level of reserve growth adversely impacts the fight against inflation, which I expect it will, a recent PBoC survey bodes ill.  A 50-city quarterly survey conducted by the PBOC found that in the first quarter, 49.2% of the 20,000 respondents said prices had become “intolerable”.  According to the results, released yesterday, the proportion was a record high, up from 25.9% in the first quarter of 2007.  

In an article on the PBoC survey, the China Daily reported:

There is some positive news on inflation, however. The survey found that just 49 percent of people expect inflation to rise in the second quarter of the year, down from 65 percent who thought so in the previous survey.  The results show the public has confidence in the country's efforts to stabilize prices, the central bank said.

I am not sure this is necessarily all good news.  This public confidence is a good thing if it restrains inflationary expectations, but I am afraid that if the public is confident that the authorities can indeed control inflation, they are likely to be all the less prepared and more disappointed if the authorities fail, and in my opinion this level of reserve growth makes me more skeptical than ever that inflation can be controlled.

Meanwhile the administrative fight against inflation is still raging.  According to today’s Xinhua:

Supervision departments were urged on Thursday to crack down on market speculation and illegal price hikes to ensure smooth market order. A circular from the Ministry of Supervision asked its local bureaus nationwide to step up inspections to ensure that the central government's price policy was fully implemented. It called for severe punishment of illegal activities including price-fixing, hoarding, cornering markets and spreading price-rise rumors to make profits.

The ministry also urged local offices to strengthen monitoring of the implementation of energy conservation and emission reduction regulations and punish violators.  Implementation of the central government's policies on fixed-asset investment and real-estate market development would also be checked and violators would be penalized, according to the document.

And as long as we are on the subject of capital inflows, the World Bank released an interesting study on global workers’ remittances yesterday.  According to the study:

The top five recipients of migrant remittances in 2007 were India ($27 billion), China ($25.7 billion), Mexico ($25 billion), the Philippines ($17 billion), and France ($12.5 billion).

At least now we can explain another $2 billion or so per month in capital inflows.

Comments (6) for "How do you turn this thing o...

Where did the hot money go? Stock market already went down 38%. In real estate market, hundreds of homeowners in a big city will not pay their mortgages since the house prices in their community drop by 35%. Food price is also dropping mildly now. Unemployment is rising since many plants are closed. So they just put the money in banks? In addition to expectation for appreciation, I think fear is the more domonant factor here. In the current global financial turmoil, Chinese stateowned banks seem to be a safer place with a stable return. I guess now PBoC is desperately hoping that Fed's policy can actually stabilize U.S. financial markets. If people sense that U.S. markets reach the bottom, the hot money will rush back to America. By fatbrick - 3/20/2008 10:02 PM

Bank deposits have been rising lately and I have heard anecdotal evidence that the informal banking sector has been particularly active recently since many smaller companies are having difficulties renewing loans. Perhaps their deposits are up sharply to -- although this kind of information is hard to get. Also there seems to have been an increase in government and private bond issuance, although I haven't seen hard numbers. I am trying to track them down. By Michael Pettis - 3/21/2008 2:36 PM

foreign debt balance rose by US$38b in Jan-Feb 2008, if we consider the maturity payment we could round it to US$40b. So Trade balance, Official capital flow ( FDI+ foreign debt) should accounted about US$90b of the US$152b increase. Another points worth looking, dollar weakened about 4% during these period vs. majors. If we assume China holds 30-40% US$1528b FX reserve in non-dollar, FX gains should provide roughly US$20-30b reserve gains. There should be sizable repatriation by Chinese households or corporate, but these are real money. Considering the explosion of globa risk aversion and plunging China asset prices, Aritraging capital flow will be very limited, maybe less than US$10b. The widening of QFII NAV discount and China property develpers failure to sell equity at 50% discount to NAV, the capital flow argument sounds illogical. What we see in market is surging risk aversion to China Asset Government should not focus too much on hot money inflow, priority should be on containing stagflation pressure. By isaac - 3/23/2008 2:17 PM

But yesterday an advisor to the central bank, Fan Gang, talked about the need to reduce speculative inflows. If hot money is not a problem, why do they all seem to talk about it amost every day, and to propose measures aimed at curbing it? I agree with Pettis that they seem to act like they think it is a problem. Even according to your numbers, Isaac, there still is $20-30 billion unexplained, and if it is "only" $10 billion a month of hot money, that is more than twice the net amount of sterilization bonds issued last year, and roughly one-fifth of total other inflows so far this year. That seems like a big number to me -- just three years ago $10 billion would have accounted for nearly all net monthly inflows. By TR - 3/23/2008 2:55 PM

Inflation is now paramount issue which called for further tightening of monetary conditions through rate hike, Rmb appreciation. Whether the potential 10% per year upside of Rmb while asset prices is dropping 10% a month is attractive enough for short term capital flow is debatable. Overall I see risk aversion is risingly globally, therefore the cross border risk taking shrinked a lot, think of the QDII-CIC-private capital outflow all slowed to a trickle or even reversed a bit. We must differentiate bettween currencies appreciation driven by risk taking and risk deleveraging. The first is short term capital inflow and mostly resulted in asset prices move. The current Rmb repatriation might not be that different form the unwinding of Yen, CHF or even commodities carry trade globally. YEN-CHF surged 12% in 2008, but this is not hot money inflow as JAP-SWISS asset continued to plunge, more likely this is unwinding of Carry trade positions. Today, the post-election surge in Taiwan Dollar and Taiwan asset prices is genuine capital inflow to Taiwan, whether this fundamental shift could trigger the millions of taiwanese selling Rmb based asset is very interesting to see By isaac - 3/23/2008 3:30 PM

No, I, as a taiwan residence, do not think that taiwanese will sell RMB, Remember that the most soaring stocks in taiwan are those related to mainland. I feel that taiwanese are now more willing to hold RMB than before beacuse it will be realized soon that RMB can be exhanged more freely in taiwan. By Wenqing Liou - 3/24/2008 2:09 PM