Tag Archives: foreign exchange reserves

Yuan Shored Up Against Pressure From Washington And Tokyo

The U.S. Treasury has, as has become its custom, again declined to label China a currency manipulator. Its latest semi-annual report to Congress does say the yuan’s effective exchange rate remains “significantly undervalued” against the dollar, though it acknowledges that the Chinese currency has appreciated by 33.8% by that measure since currency reform started in 2005. It again calls for more exchange rate flexibility on Beijing’s part. All pretty much par for the course, and intended for domestic political consumption as much as anything.

More weight is given to its call for stronger policy changes on Beijing’s part to embed rebalancing. The Treasury remains concerned that the lessening of the surplus on the external account isn’t “enduring”. “Without more forceful structural reforms to promote domestic consumption, there is a risk that China’s imbalances will re-emerge as the global economy recovers,” it says. There would be little disagreement from this Bystander that further exchange rate reform is a necessary if far from sufficient condition for rebalancing.

In the meantime, the People’s Bank of China seems to have been intervening in the foreign exchange markets again on a large scale with activity intensifying since the fourth quarter of last year. The reversal in the slowing of foreign exchange reserve accumulation seen in the first three quarters of 2012 points to this.

This may as much as anything be being driven by the weakening of the yen ever since it became clear that Shinzo Abe would become prime minister last November. Though the official line in Tokyo is that the new government and its newly installed governor of the Bank of Japan aren’t targeting exchange rates, a weaker yen is a necessary precursor for the aggressive monetary policy aimed at achieving an domestic inflation target of 2% to work. Washington says it is monitoring the yen closely. With the yuan still closely tied by its 1% band to movements in the dollar, so is Beijing.

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China Cuts Its Holdings Of U.S. Treasuries–Or Not So Much

China cut its net holdings of U.S. Treasuries by 12% in the second half of last year, more than twice as much as previously reported, according to the preliminary annual revision of the U.S.’s monthly Treasury International Capital (TIC) report. And it probably doesn’t mean anything much beyond what we already know.

The new TIC report on major foreign holders of U.S. Treasury securities shows that China’s holdings fell from $1.31 trillion last July to $1.15 trillion in December, with a sharp net sell-off coming in that last month. The TIC monthly numbers had shown a fall from$1.17 trillion to $1.1 trillion over the same period. The annual revisions are considered more accurate than the monthly numbers. They take into account the true origin of buying done through third countries. A new series of monthly numbers introduced in January this year will narrow the accuracy gap, though not close it. (U.S. Treasury note on all this here.)

China buys a lot of U.S. Treasuries through London, and, to a lesser extent other popular custodial centers such as Luxembourg, Belgium, Switzerland and the Caribbean. Once this is taken into consideration, the preliminary June baseline number for its holdings increased to $1.31 trillion from $1.17 trillion. Hence the doubling of the percentage net sell-off in the second half of last year.

A year-on-year comparison paints a different picture: China’s holdings at $1.15 in December 2011 were down less than 1% from $1.16 trillion a year earlier, and might have been higher had there not been a heavy sell off in December last year from November’s holdings of $1.25 trillion. China typically reduces its Treasuries holdings towards the end of a year.

The numbers for the second half of last year were always likely to be closely watched. The political kerfuffle in Washington over the debt ceiling during the autumn put the U.S.’s AAA-credit rating at risk. Also, overseas investors generally were buying higher-yielding U.S. mortgage securities ahead of what was expected to be a further round of quantitative easing by the U.S. Federal Reserve.

There are other factors consistent with a long-term fall in China’s Treasuries holdings, among them a shrinking trade surplus and the gradual rise in the yuan against the dollar. This time round, Beijing has also likely been buying euro-denominated sovereign debt, both to diversify it holdings further (which it has been doing for some time) at fire-sale prices, and to provide some political backstopping for Europe during the euro-debt crisis. The State Administration of Foreign Exchange (SAFE), which manages the country’s foreign exchange reserves, is also pursuing equity investment and a little buying of gold and more of other commodities. When you are sitting on $3.2 trillion in reserves, you have to chase a little yield. The Wall Street Journal calculates that the share of China’s reserves in U.S. securities has fallen to a decade-low 54%.

While SAFE  hasn’t been putting all the extra foreign-exchange reserves that China has been taking in into U.S. dollar denominated assets for a while, more recently, the U.S. Federal Reserve has been buying long-term Treasury bonds as part of its easing program, Operation Twist, as the putative QE3 became. Americans who bleated about their country being in hock to the Chinese, can now bleat about being in hock to their own Federal Reserve–for some an even greater evil. For the rest, China still owns more than $1 trillion of American sovereign debt to get het up about. Nor does China have too many other places to put it.

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China Gets A Greater Strategic Taste For Gold

There is a whiff of coordination to a couple of published comments suggesting the country should convert some of the dollars it is holding in its foreign-exchange reserves into gold to avoid losses from a weakening dollar. Shao Fenggao, an official at China Construction Bank, writing in China Business News, echoed a similar sentiment expressed by Meng Qingfa, a researcher at the China Chamber of International Commerce, in the International Business Daily, a newspaper affiliated with the Ministry of Commerce, whose minister recently said dollar issuance in the U.S. had gotten “out of control”, exporting inflation to China.

China’s foreign-exchange reserves are the world’s largest. They hit a record $2.65 trillion at the end of September, but gold accounts for less than 2% of the total, an extremely low percentage by global standard. In raw terms, China owns 1,054 tonnes of gold, as best is known; the U.S. holds 8,133 tones. If China did up its gold holdings, it would be doing so after a bull run that drove prices of the metal to new records, but if it did so on any scale, say to match America’s holding, as some officials have suggested, it would reinvigorate the gold bugs who have taken a breather recently. The China effect would be just the same on gold as on any other commodity.

Another straw in the wind of the changing attitude towards gold is the easing of import controls on gold bullion last month, letting Chinese investors buy more on global markets. Beijing used to fret that too much gold coming into the country would mean a drain on its stocks U.S. dollars. Those are less valuable assets to preserve these days, and will only be increasingly so as the yuan strengthens against the dollar. Switching foreign-exchange reserves into gold would also be a move in the direction of strengthening the yuan’s credibility as a global reserve currency — a double reason for buying gold.

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China’s Foreign Exchange Reserves Breach $2 Trillion

China’s foreign exchange reserves have topped $2 trillion–$2,131.6 billion at end-June to be precise. Hold the presses, whatever they are.

It is a symbolic number rather than anything else. While China’s exports have fallen (down 21.8% year-on-year in the first half to $521.5 billion), imports have fallen faster (down 25.4% to $424.6 billion over the same period). That pushed up the trade balance to $96.9 billion in January-June. The reserves grew by $178 billion in the second quarter. They were up only $7.7 billion in the first quarter.

The People’s Bank of China will want to mop up some of this liquidity, so expect a tightening of monetary policy over the next few months — we are already seeing the bill sales to drain cash from the system. The central bank’s challenge will be to do so in a way that neither spooks markets being inflated by hot money inflows, nor undermines the drive to the politically all-important 8% growth target for the year.

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BRICs and Brickbats Over The Dollar’s Reserve Currency Role

Brazil, Russia, India and China meet on Tuesday in Yekaterinburg for the first summit of the so-called BRICs, the four leading emerging economies.

They see themselves as a leading voice for the developing world and as a counterweight to the developed world’s dominance in international economic matters as represented by the G-7. As such they want to want to boost their role as global players and increase their collective weight in international organizations.

So far, they share too little in common beyond large, fast growing developing economies to have acted as a bloc. One arena in which they might have been expected to exert collective clout and to speak as one for the developing world was the seemingly interminable Doha round of world trade talks. Yet the interests of China’s low-tech farmers were different from those of their Indian counterparts and far too different from those of Brazil’s high-tech farmers for there to be any unity.

There is one issue that is emerging, however, on which they could speak with a common voice, and it is one on which Beijing has already been a herald: the challenge to the role of the dollar  as the world’s sole reserve currency. Beyond the statistics commonly trotted out to describe the BRICs — they cover a quarter of the world’s land surface, are home to 40% of the world’s people and account for 15% of world GDP– is one highly relevant to this issue: they hold 42% of global foreign exchange reserves.

As well as giving repeated airings to its concerns about the falling value of the dollar on all the U.S. debt it owns, Beijing has switched $50 billion of its admittedly more than $1 trillion of reserves into multi-currency based bonds issued by the International Monetary Fund. Russia has moved $10 billion and Brazil’s central bank has just announced it is doing the same with a similar amount of its reserves. The BRICs want more say over the IMF and are putting a bit of the money at least where their mouths are, and Beijing in particular would be most pleased for the IMF emerge as more of a counterweight in the global financial system to the U.S. The issue will figure prominently at the meeting in Yekaterinburg, a town historically redolent of executing the old order.

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Dollars, Coppers, Any Old Iron

A new twist in the saga of what China is doing with its still mostly dollars foreign exchange reserves: Brian Jackson, senior strategist at Royal Bank of Canada, reckons that it is using them to stockpile commodities such as copper and iron ore as the voices in Beijing fearing the ever rising cost of Washington’s financial bailout will only push inflation higher and the dollar lower get more strident. “Increased spending on commodities represents a reallocation of China’s sovereign wealth away from the accumulation of financial assets,” Jackson said in a May 15 research note (here via Bloomberg ).

April’s imports of iron ore and copper were at record levels last month, not given the slowdown in growth what would be expected from underlying industrial demand, though Prime Minister Wen Jiabao said in March that China would take advantage of globally low commodity prices to stockpile natural resources. But long before that Wen had expressed his concerns about the dollar’s fall in value and its impact on the value of China’s foreign reserves (see “China’s Dollar Dilemma“).  If Jackson is right, then the commodities stockpiling may be a more strategic than opportunistic move than it first appeared.

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China Becomes A Gold Bug

China says it is now the world’s fifth largest holder of gold. Hu Xiaolian, head of the State Administration of Foreign Exchange, told Xinhua that China’s gold reserves stood at 1,054 tonnes at the end of 2008. That is up by 454 tonnes from the last time the country made the size of its gold holdings public five years ago. China, which is the world’s largest gold producer, is now owns more gold than Switzerland and is one of only six countries to hold more than 1,000 tonnes of the metal.

Hu’s announcement is further evidence of Beijing’s diversification of its foreign exchange reserves away from dollar-denominated assets, though to keep things in perspective, the gold holdings are worth $31 billion at current prices, versus foreign exchange reserves of  nearly $2 trillion, and the U.S., the world’s largest holder of gold has 8,134 tonnes, according to the World Gold Council.

The question for investors is whether Beijing plans to buy more and, if so, how much. Intriguingly, the IMF has a 400-tonne holding it has indicated it wants to sell.

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China’s Reserves Swell More Slowly

The country’s foreign exchange reserves grew in the first quarter by less than they did in the fourth quarter of last year. Reserves stood at $1.95 trillion at the end of March, the People’s Bank of China reports, up $7.7 trillion since the end of December, when they had shown a more than $40 billion increase over the previous year. The first quarter increase was the smallest quarterly gain in eight years.

The numbers are little surprise in that they reflect the shrinking of the trade surplus, which was down 45% in January-March compared to October-December, but they will also reflect the lower returns China is getting on its pile of U.S. Treasuries ($740 billion-worth according to U.S. data) and the weaker euro against the dollar to which the yuan is holding/being held flat.

The deceleration of the growth rate of the reserves is likely to continue in the months ahead, but the pot is still big enough to fund more U.S. debt purchases and foreign acquisitions such as natural resources though loans-for-energy deals. Watch for one of those with Kazakhstan shortly.

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Dollar-Bound

Even with a slowing economy and export markets slowing faster, China has a lot of trade surplus dollars to recycle. Its foreign-exchange reserves are in excess of $1 trillion and they sit mostly in U.S. dollar-denominated assets.

The American currency depreciated steadily for the past four years, though it has rallied recently. This may be a technical rally due to a rare combination of unwinding of derivative positions at a time when shorting the dollar is nigh impossible because of the lack of liquidity; though the flight-to-quality rally school will remind you that, though counterintuitive, there is precedent for the dollar to rise during recessions.

Regardless, the losses on China’s dollar-denominated assets have grated with some officials. So has the fact that China has been subsidizing what is now seen as American extravagance and a broken U.S. financial system — while all the while being lectured about how China’s markets should become more like the U.S.’s; schadenfreude alert.

China has started to diversify its foreign-currency holdings, though that has perils of its own as some of the recent foreign exchange losses by Chinese companies have shown (see:”Two More Chinese Firms Reveal Forex Losses“) And more trade in recent years has been denominated in currencies other than the dollar, such as oil in euros. A lot of oil producers would be happy to undermine dollar hegemony, and a world where the dollar shares trade shelf space, so to speak, with the euro and the yen looks more like the multipolar world of the global economy.

But there is no substantive alternative to the U.S. dollar as the world’s default reserve currency. Neither the Europeans nor the Japanese want it. Nor can the renminbi, still not fully convertible, aspire to the role.

The notion of creating a non-national global reserve currency has been floated many times before, and will no doubt be giving another airing during the forthcoming run of proposed world leaders’ summits on the financial crisis and a new regulatory regime.

There was some corridor chatter about the idea at the Asia-Europe summit in Beijing at the end of last week. But it would be a brave punter who bet on it coming about. Indeed, the substantive move to come out of the summit on this front was a Chinese-Japanese agreement to support the dollar jointly. They just can’t afford otherwise.

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