Today’s Xinhua article brings to our attention that China’s forex reserves have ballooned to $1.76 trillion as of the end of April. To put this number in perspective: it is about 15% of the US annual economic output.
Before people get carried away, allow me to explain what the forex reserves is not: it is definitely not the government’s money, so there is no sense in talking about the government spending it. It is also not some kind of surplus money sitting around with no purpose. The forex reserves is part of the collateral that backs RMB-denominated debt obligations of China, and that includes all Chinese money and government bonds.
According to this Xinhua article, which quotes AFP, which got its information from a “Chinese media source” (got it?), China’s forex reserves increased by $74.5 billion in the month of April, or $100 million per hour. (The article and all the English ones that copy it say $10 million, but they all did their math wrong!)
China’s (mainland) forex reserves is followed in size by Japan’s at $1 trillion, Russia’s at $548 billion, India’s at $316 billion, and Taiwan’s at $287 billion. Of course, only Japan is part of the G7 in this group, so it is an exercise for the reader to figure out how much the remaining 6 of the G7 have.
A large forex reserve gives currency stability and can be a defense of a country’s credit-worthiness. On the other hand, its rapid increase adds to the inflationary pressure in China. Besides trade surplus and foreign investments, nobody has a good idea for where all this extra money is coming from — from Chinese expats, perhaps? I know many of them have sent money back as the RMB rises something like 8% a year against the USD. (On a side note, isn’t it interesting that the shrill rhetoric of Congress to make China revalue the RMB or face punitive tariffs has all but vanished…)
Something to ponder, where is this all headed?
Too bad so much of this wealth is denominated in the (rapidly declining) US dollar!
I admit it, I’m one of those Chinese expats who wired back “hot money” to take advantage of the rise in rates. (And it was a good idea! 10%+ in half a year.)
As far as how to use it… well, I’ll say I’m a little surprised Chinese enterprises haven’t been *more* aggressive in purchasing overseas assets, especially during the recent economic downtown in the US. So, I’m not sure what Beijing has in mind. Any other experts out there with insights..?
Well, I am also one who sent some money back more than one year ago. It had shown a nice return very quickly too. Nevertheless, I decided there was no need to follow up with more. It is easy for the hot money to flow in. The issue is how to take it out to realize the gain, which probably addresses Buxi’s question. Essentially, whatever gains I got in Renminbi will stay in Renminbi. That’s OK. I could always tap into that nice chunk of change when I visit China for travel expenditures.
I’ll say I’m a little surprised Chinese enterprises haven’t been *more* aggressive in purchasing overseas assets, especially during the recent economic downtown in the US.
I cannot figure out a single reason why you were surprised rather than you were being sarcastic. Chinese wealth management funds have been trying to invest in the US(i.e. buy American assets) but they are faced with so much restrictions and suspicions. Even in the recent sub-prime crisis Americans are suspicious of sovereignty wealth funds(not only the Chinese ones). Laughably they are concerned with the transparency issue of SWFs and worried about *national security*（huh, isn’t it protectionism?) Ironically only if China has such large amount of forex reserves can it potentially be a *national security* issue to Americans.
The US dollar will eventual begin to appreciate soon and all losses(if there is any) only stay in the book. The key issue is not the nominal loss, it’s how China’s central bank loses its policy independence because of these forex reserves.
No, I wasn’t being sarcastic. You’re right about restrictions and suspicions, but the sub-prime crisis is exactly what I’m talking about. Various sovereign funds from Singapore and the Middle East bought huge stakes in various American banks at a heavy discount, and it’s know investment bankers were knocking on the doors of Chinese banks hoping for capital… and the Chinese investors largely weren’t interested.
Thanks for the insight on appreciation + policy independence.
Why would the US dollar appreciate while Americans are eager to pile on debt? Moreover, the trend of disconnecting the US dollar from oil trading is going to undermine further its value.
Nationalist, protectionist posturing by Americans won’t prevent the dollar from further devaluation. In the meantime, Canadian exports into the US will be hit hard and the Americans will make foreign policy based on a soaring, in US dollars, cost of oil.
The Chinese have been looking at acquiring offshore assets. The hurdles are huge. I expect that, at some level, the way the West reports China is colored by suspicions of Chinese capitalism.
Wealth management is an area that China is a bit behind. For a long time, China was very poor and the sole goal was to save as much as possible. Now many people have more savings than they can spend, and they are asking, what can we do with the extra money? How do we make most efficient use of the extra money? Putting money in the bank or buying US bonds will not get the most return for the investment. What else can we do?
I think it’ll take time, maybe a decade or two for China to get up to speed. There will be difficulties such as foreign protectionism. But it’s part of the process.
rocking offkey says
It’s called the original sin.
The comparative advantage of US is now is finance and innovation.
The Chinese sovereignty funds did invest in the US assets in the sub-prime crisis. China Investment Corporation (CIC) invested 5 billion into Morgan Stanley. It’s not a huge investment but it’s comparable with other SWFs’ investment in the sub-prime crisis. CIC is a newbie in the Darwinism market although it has the same talent as well-established banks and wealth management funds. Embarrassed by its first investment, which has lost 50% of its book value accumulatively, CIC is very cautious when seeking opportunity. I doubt it has a clear strategy and can make good use of its talent due to the inherent bureaucratism(which is the main reason for its loss in BlackStone). CIC also faces competition from the State Administration of Foreign Exchange, which has made several deals with foreign banks under the radar. So actually China’s investment in foreign assets, other than US bonds, is more than you believed, but still, far less than the forex reserve itself.
as soon as inflation caused by the weak dollar policy hit the US economy, the dollar will begin to appreciate.
I’m lost. How does inflation appreciate the value of a currency? If it takes me twice as many Canadian dollars to buy a commodity (inflation) then the Canadian dollar is worth half as much (depreciation).
When a country has loads of debt, the value of that country’s currency is going to be driven down. There are other factors but debt is a huge one. When the value of the currency is driven down, imports get more expensive. This can drive inflation.
I don’t expect the value of the USD to increase in the short term.
If the States have something to export, the lower value of their dollar will help that sector, just as the higher value, relative to the USD, of the Canadian dollar has hurt manufacturing in Ontario. This could help with jobs in the States. The lower valued CND was a good thing for Eastern Canada.
Unfortunately, as the USD sinks, we’re all, China included, going to find it harder and harder to sell into the US. This will have a detrimental impact on business that rely on exporting to the US. If the US extends their adventure into Iran, it will only get worse.
But, KL, if you can map out a different scenario, I’d love to see it.
In a flexible exchange rate system(like the US one), there are too many factors that could have impact on exchange rate, such as domestic interest rates and international(other countries’) interest rates, monetary supply, product capacity, pruchasing power, etc. Worried about the sub-prime crisis, the US government and central bank(FED) took irregularly aggressive actions to “stimulate” the economy, like pouring large amount of US dollars(which basically are just paper) into the market and lowering the interest rate. Such policies, along with people’s expectation of recession, resulted in the weak dollar.
It’s hardly convincing to say the States’ huge debt is the main reason of dollar depreciation since it has carried such huge amount of debts for a long time without dramatic dollar depreciation.
Unlike central banks in a fixed exchange rate system(like the Chinese one), FED doesn’t really care about a lower exchange rate of US dollars(which is a depreciation against other currencies), however it care more about domestic economy, of which inflation and growth are core aspects. A loose monetary policy and aggressive fiscal policy, as in the sub-prime crisis, were taken to stimulate the economy(growth). Yet such policies will result in inflation, the other major concern of FED.
As the past few months tell, FED has tried to raise interest rates in fear of a over-loose monetary policy and high inflation. Its efforts resulted in appreciation of US dollars. However, a few days ago, Bernanke suggested that FED would soon stop raising interest rate because the economy haven’t recovered from the crisis, and dramatically the US dollar sunk down right after his speech.
But tradeoff is everywhere in economics. If Americans want to sustain their growth, they have to pay something for it. So they get inflation as a gift, prices rising everywhere, from food to oil, and they even have to pay more for cheap Chinese junks. Now it’s a war between fear of recession and fear of inflation. If the signal of inflation wins over that of recession, the monetary policy will immediately be tighten up and interest rates go up. Then we can go back to the strong US dollar era and continue to cover American people’s debt, what a paradise!
I recommend you to read the article linked below:
Well, it’s in well-written English with few economics terms involved.