My Blog

July 14, 2008

The PBoC announced this morning that total reserves at the end of June reached $1.809 trillion (around 45-50% of annual GDP).  This breaks down to $153.9 billion growth in the first quarter of 2008 and a $126.6 billion growth in the second.  The PBoC do not release monthly figures officially, but we get pretty good unofficial leaks and, according to today’s Xinhua, this implies that reserve increases in the month of June were $11.9 billion.

Given that the trade surplus and FDI for the month were $21.3 billion and $9.6 billion, respectively, June’s $11.9 billion number is almost certainly going to cause some unnecessary excitement about flight capital.  June’s increase is the lowest monthly increase in a long time, and a lot less than the $54 billion average for the first five months of the year, but most of us were expecting June’s number to be a lot lower than average – in my July 9 entry I guessed it would be about $20 billion.  The main reason for this was June’s 100 basis point increase in minimum reserve requirements, which we believe was redenominated into dollars, thus bringing headline reserve growth down by about $45 billion.

That means the actual amount of net inflows purchased and monetized by the PBoC in June was actually around $57 billion, which is a lot lower than the $67 billion average for the first five months of the year, but this average number includes the two extraordinary months of January and April.  Excluding these, June’s numbers are fairly typical.  The table below shows what really happened, as far as I can piece it together:

We shouldn’t be too concerned with interpreting changes in the month-to-month data because there are timing lags and accounting transactions that we don’t know about, but in the aggregate the total increase in reserves this year would have been about $465-70 billion if nothing had been “outsourced” to proxies, more than last year’s total increase in headline reserves of $462 billion.  About $66 billion of this did not need to be purchased by the PBoC because it represents valuation gains and interest income on their portfolio.

Of the roughly $400 billion that the PBoC did purchase this year (thereby creating domestic money and central bank bills for an equivalent amount), the relatively stable FDI and the trade surplus accounts represent about 38%, with the rest consisting of other inflows, including hot money.  I estimate that FDI has about $15-20 billion of hot money and accelerated disbursals buried in the numbers, and the trade surplus should have at least $10 billion of disguised hot money inflows (assuming average under- and over-invoicing equal to just 1% of total exports and imports), which suggests that trade and FDI may account for significantly less than one-third of the money the PBoC was forced to purchase.

What was the rest of the $260-70 billion or so?  Some of it represents official loans, transactions on the services account, income on investments, and a bunch of other things, but clearly there is a lot of other, less stable, money coming into China.  Is it hot money?  That depends on what you mean by hot money.  If you define hot money as any money that came into China or whose disbursal was accelerated largely because of rising RMB expectations, than a lot of this is “hot”.  If your definitions are more restrictive – money that can come in quickly or leave quickly – less is “hot”, but Logan Wright’s guess of $160-180 is not unreasonable, and is perhaps even a little low, since he doesn’t count hot money buried in FDI and trade.

The point is that whatever it is, the amount of speculative capital coming into China is big and unstable.  Logan and I discuss why in a piece in today’s Financial Times.

Comments (6) for "June headline reserve growth...

Well, an interesting spike in the USD/CNY today anyway: http://finance.yahoo.com/q?s=USDCNY=X By Stefan, Tallinn - 7/13/2008 7:38 PM

Although one should not read too much into only one month data (wthether April or June), the perception about China's macroeconomy and exchange rate seems to change slowly. People now see the numerous challenges in China and begin to realize that the fundemantal might not justify the future large appreciation. It is no longer a 100% one-way bet. One andecote evidence is the increasing cautious articles abuot the worrying economic conditions in China. It is somehow a good trend: it should help PBOC to keep the current rates unchanged for a while and stop tightening further, which would hurt economy badly and bring China into a recession. By fatbrick - 7/13/2008 11:39 PM

Michael, what thing strikes me as odd: If $250bn are flowing into China within 6 month, why is the stock market collapsing at the same time? Why are house prices going down? If there is speculative money around, both should go up not down. Where is the money going? As you have pointed out in your post from June 11th, there seems to be enough liquidity in the market. By Gregor Neumann - 7/14/2008 7:22 AM

Michael, Clearly the reserve growth is slowing down very quickly. How do you interpret this? By Mark Mak - 7/14/2008 10:10 PM

MM, I disagree. Reserve growth is not slowing at all. It is only slowing relative to the astonishing April number, but real growth of $50-55 billion is much higher than last year's monthly average of $40 billion, or 2006's already too high monthly average of $20 nillion. Gregor, excessively loose money, whether caused by hot money or otherwise, does not necessarily cause the stock market to go up (after all, for all the Fed's looseness, the US also experienced a stock market crash in 2000). It is likely to make the stock market extremely speculative, and this is certainly the case in China. Where is the money going? Bank deposits, real estate in secondary cities, hoarding of commodities, and the informal banking sector -- all these areas are experiencing signs of excess money. Fatbrick, I don't think the RMB is any less a one-way bet. Just because China may be slowing marginally (still growing at over 10%) doesn't mean the currency is overvalued. After all, the US is slowing much more sharply, so doesn't that prove the dollar is overvalued? But how can the dollar be overvalued relative to the RMB and the RMB be overvalued relative to the dollar? By Michael Pettis - 7/15/2008 1:46 PM

FT article: "But when conditions change and the economy begins to slow or the country face financial risks, hot money is likely to flee the country, exacerbating the very conditions it is fleeing." What does this mean? Does this mean one can expect more 40 foot container loads of prospective emigrants fleeing China? Or, does this mean increased nationalism as the system falls apart? By BunchBaloney - 7/15/2008 1:49 PM