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:
Quarter 1
April
May
June
Total
Headline reserve growth
154
75
40
12
281
Trade surplus
43
17
20
21
100
FDI
27
8
8
10
52
Currency gains
38
(12)
1
4
31
Interest
17
6
6
6
35
Unexplained amount
31
57
4
(29)
63
Reserve hike
30
18
18
45
111
Adjusted reserve growth
183
93
58
57
391
Unexplained amount
61
75
22
16
174
Transfer to CIC
75
-
-
-
75
Adjusted reserve growth
258
96
58
57
467
Unexplained amount
136
75
22
16
249
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.
Michael Pettis is a professor at Peking University's Guanghua School of Management, where he specializes in Chinese financial markets. He has also taught, from 2002 to 2004, at Tsinghua University’s School of Economics and Management and, from 1992 to 2001, at Columbia University’s Graduate School of Business. He is a member of the board of directors of ABC-CA Fund Management Co., a Sino-French joint venture based in Shanghai.
Pettis has worked on Wall Street in trading, capital markets, and corporate finance since 1987, when he joined the Sovereign Debt trading team at Manufacturers Hanover (now JP Morgan). Most recently, from 1996 to 2001, Pettis worked at Bear Stearns, where he was Managing Director-Principal heading the Latin American Capital Markets and the Liability Management groups. He has also worked as a partner in a merchant banking boutique that specialized in securitizing Latin American assets and at Credit Suisse First Boston, where he headed the emerging markets trading team. Besides trading and capital markets, Pettis has been involved in sovereign advisory work, including for the Mexican government on the privatization of its banking system, the Republic of Macedonia on the restructuring of its international bank debt, and the South Korean Ministry of Finance on the restructuring of the country’s commercial bank debt.
Pettis is a member of the Institute of Latin American Studies Advisory Board at Columbia University as well as the Dean’s Advisory Board at the School of Public and International Affairs. He is the author of several books, including The Volatility Machine: Emerging Economies and the Threat of Financial Collapse (Oxford University Press, 2001). He received an MBA in Finance in 1984 and an MIA in Development Economics in 1981, both from Columbia University.
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in today’s Financial Times.
December, 2007