It’s now (sort of) official: China’s end 2004 reserves totalled $610 billion. China still has not found time to post their end October reserve totals on their web page, but they just leaked their end of year totals.
It is an impressive sum. $610 is well over a third of China’s GDP, almost 40%. US international reserves are under 1% of US GDP. The government of China’s international assets are larger (relative to its GDP) than the United States international debt. That is because China’s reserves are exceptionally large -- not because the US has little international debt (High external debt to GDP ratios are less worrisome is a country exports a lot. The US, unlike China, exports comparatively little. The US debt to export ratio is already scary).
China’s reserves increased by $200 billion in 2004 -- an enornous sum for an economy of China’s size. $200 billion is more than 10% of China’s GDP. It is hard to sterlize (sterilization = issuing local currency bonds to keep the money supply from rising as reserves rise) that large an inflow even if you have deep and liquid financial markets, let alone China’s underdeveloped financial markets. The WSJ reported China issued about $70 billion in renminbi sterilization bonds in 2004, not enough to avoid a big increase in the money supply.
$200 billion is not just large relative to China’s GDP, it is also large enough to cover a major chunk of the United States need for financing. Say $10 billion of that came from the euro’s appreciation this year, and China bought 40 billion of euros during the course of the year. China would still have had $150 billion to lend to the US. That’s enough to fund about a quarter of our current account deficit. China is punching way above its economic weight, though since roughly one of every four people in the world is chinese, maybe they are just doing their fair share ... Say China spent $90 billion buying euros, and only had $100 billion to lend to the US. That still is enough to fund over 15% of our current account deficit.
By the way, the $40 and $90 billion in new euro purchases are probably the lower and upper bounds for China’s euro purchases. China clearly bought more euros this year than it did in 2003. But i suspect it had more room to buy euros over the summer without putting pressure on the market than it did in the fourth quarter, when it had to buy dollars like mad to keep its currency from rising as much as the dollar.
This data only confirms my sense that the two most distorted prices in the global economy are the renminbi-dollar, and the price of the 10 year treasury. Of course, those the two are linked. More later.