from Follow the Money

East-East flows.

December 1, 2006

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Most gulf oil flows East.

And most of the talk at the DIFC/ Euromoney conference was about what HSBC has labeled East/ East financial flows.     Gulf money wants to flow east as well

No doubt such flows exist.  But they still strike me as small relative to (far less exciting) flows into the US and Europe.  Here is why.

Heather Timmons of the New York Times reports that investment bankers are looking at a $20-30b flow from the Gulf to Asia next year.  

“The banks estimate that Middle East buyers will snap up some $20 billion to $30 billion in Asian assets in the next year, with a focus on real estate and industrial companies.”

That is real money, no doubt. 

But I would bet that the Gulf’s current account surplus will be about $150b next year, assuming oil stabilizes around $60 and Gulf state imports and spending continue to rise.   That leaves $120-130b to invest in the rest of the world.  Some will go to the parts of the Middle East that don’t have oil (Egypt, Jordan even Turkey).  But most will go to the US and Europe – where there are big, deep, liquid markets that can absorb big flows.

What of 2006?  No doubt some Gulf money flowed into Asia.   KIA took a large share of ICBC’s IPO, as did QIA (Qatar’s investment arm).  ADIA seems to have bid as well .. and so on.   One of the big Gulf funds also (I think) participated in the consortium’s that made pre-IPO investment in the Chinese banks as well.  Government investment funds like buying shares in state banks.    

Those investments have done very, very well indeed.  Ask Goldman.   Investments in Indian stocks have also done well.   Hence the interest.  Lots of folks are chasing last year’s good investment.

But if flows in 2006 are gonna rise substantially to $20-30b, that suggests to me that flows this year were in the maybe $10b range.    Gulf flows into the Chinese bank IPOs seem to have been in the $1-2b range.  China wouldn’t let the Gulf investment funds buy more!    Total foreign inflows into Indian stocks from all over the world are only in the $5b range this year.   I doubt the Gulf provided more than $1b of that.

The Gulf’s current account surplus is going to be in the $200b range.  The Gulf is attracting some capital inflows as well (project finance mainly).    Let’s set those aside though.  Even if $10b flowed from the Gulf to Asia in 2006 and another $10b flowed from the Gulf to Egypt, Lebanon, Turkey and the like, balance of payments math suggests that $180b flowed from the Gulf to the US and Europe …

Those big flows, however, are rather politically incorrect flows.  Better to talk up the much smaller (I suspect) flows to Asia … 

But there is one point here that is important.  More oil state spending implies more imports from Europe and Asia – and somewhat less demand for financial assets.   A shift toward Asia also implies somewhat less Gulf demand for US and European financial assets.    So Gulf demand for US debt/ equities and dollar denominated bank accounts will likely fall significantly ..

The saving grace?   Asia doesn’t need the Gulf’s money.   As a region Asia runs a big current account surplus.  One region with a lot of surplus savings cannot finance another region with a lot of surplus savings.   At least not in aggregate.   

What do Chinese banks do with the funds they have raised in the Gulf?    

Buy US treasuries!  Or maybe agencies or even CPDOs …

The global current account only adds up if the regions of the world with more savings than they need finance the regions of the world with less savings that they need. More Gulf flows to Asia, barring other adjustments, just imply more Asian financing of the US … 

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