from Follow the Money

$45b for China in April, at least $33b for Russia in May — global reserve growth remains exceptionally strong

June 1, 2007

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China’s reserves apparently increased by $45b in April, rising to $1247b.

Krzysztof Rybinski of Poland’s National Bank asks what fraction of China’s April increase is real and what fraction comes from valuation changes. 

My answer: if, as I suspect but cannot completely prove, China has between 70% and 75% of its reserves in dollars and 25-30% in non-dollar currencies – then valuation gains could explain $7-8b of the increase.   China after all might have up to $360b in euros and pounds (30% of $1200b) and the euro and pound did well in April.    If China held more yen and fewer euros and pounds, its April valuation gains would be smaller.

$7-8b in valuation gains implies a still very large $37-38b “real” increase in China’s April.   China’s April trade surplus was $18b, China’s current account surplus is about $5b a month larger than its trade surplus (remember that China should get about $4b a month – more actually – just in interest on its reserves) and China usually attracts about $5b in FDI.    All this implies a $10b or so of April’s valuation-adjusted reserve growth came from other sources – whether from the ongoing expiry of various swaps or from true “hot money” inflows into Chinese stocks. 

$37-38b is not far from $40b – or a $480b annual pace.  Taking into account the ongoing increase in China’s exports, which should generate very large trade surpluses in the fall,  Stephen Green’s forecast of $500b in 2007 reserve growth isn’t looking far off the mark. The strong increase in China’s reserves though isn’t much of a surprise.   

The really big change is the q2 is that Russia now posting China-like reserve numbers.  Russia's reserves increased by $33.2b from April 27 to May 25 – and valuation changes worked against Russia, not for it – during this period (the euro retreated a bit).   That is a truly stunning number.   Russia’s economy is far smaller than China’s economy.  All told, Russia’s reserve are up $63.4b from the end of March to May 25, and only a tiny bit of that is valuation.    Unless something changes, Russia’s q2 reserve growth should be close to $90b. 

No wonder Danske bank claims Russia won’t be able to avoid a revaluation (hat tip Christian Menegatti) …  

And we should soon figure out just how much the Brazilians spent to keep the real from moving from 2 to 1.9 at an even faster pace than it did.  Brazil stopped reporting its daily reserves data in May, but I hope they are will at least release their monthly data promptly. 

In April, Russia and China added over $60b to their reserves (Russia’s April increase was $30b, but that includes a bit of valuation).  Brazil added another $12b.  Even though India has scaled back its intervention, the BRICs were good for around $75b – and I would be surprised if total global reserve growth wasn’t well over $100b in April.    

That is an enormous sum.  But apparently not one that gives the IMF much pause.   Rybinski reports that the IMF’s current top brass thinks that “imbalances” are a medium-term concern, not a short-term concern.   Anne Krueger expressed a similar view on a panel in Washington DC this week. 

Maybe.    So long as the official sector is willing to increase its financing of the US on a sufficient scale to make-up for any shortage of private financing, there isn’t much to worry about.   The New York Fed's custodial accounts for foreign central banks are still rising by an average of $10b a week this year.  They rose by $15b (a blackstone a day) last week .

I am not quite as sanguine as the IMF.  A$850b US external deficit seems to exceed what private creditors are willing to finance in good times – and far exceeds the deficit private creditors are willing to finance when the US is growing more slowly than the rest of the world.

If private flows to the US pick up, then the central banks can scale back without prompting any trouble.  But if the central banks should ever act on their worries about their growing exposure to the dollar in the absence of a strong rise in private demand for US financial assets, watch out.  

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