from Follow the Money

Thank you, China and Brazil. Russia and India, please pull your weight.

May 15, 2007

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China increased its US holdings by 52.5b in the first quarter (a $200b annual pace).   China bought a lot of everything, but more Agencies than anything else.

That almost certainly understates China’s true purchases.   Chinese flows in the TIC data were about $90b less than the flows implied by the Treasury’s survey of foreign portfolio holdings the last two years.  Some bonds bought in London and Hong Kong were likely bought for China’s accounts.

Brazil increased its US holdings by $23.1b in the first quarter – with almost all of its money flowing directly into the Treasury market.

Russia came in at a mere $6.3b (mostly in Agencies, as usual).   That isn’t much, given the increase in Russia’s reserves.

India came in at $6.1b, all from rising short-term claims.

Russia and India are diversified.   Brazil and China are not.    It is safe to assume that Russia and India were big sellers of dollars for euros and pounds in q1.  

That isn’t really much of a secret.    Russia told us it diversified in the first half of 2006, and Brazil supposedly reports a high dollar share in its target portfolio.  It isn’t all that hard to figure out that India holds a lot of pounds or euros.    As for China, well, it takes a bit more work – but I am pretty confident it holds around 70% of its assets in dollars. 

In total, the BRICS and the Gulf – the “Asian oil exporters chipped in $10.5b in q1 -- provided the US about $100b in financing in q1, according to the TIC data ($98.5b to be exact).   It is safe to assume that almost all of its came from their central banks and oil funds. 

Actually, the $100b in financing almost certainly understates their actual financing of the US.   Remember that China’s reserves went up by $135b in q1 …  It alone could have provided $100b.

There is another clue.   The TIC data reports total official inflows of $86.7b in q1 (see line 32). 10.6b of that is corporate debt and another $22.4b is bank deposits.   Total holdings of long-term Treasuries, long-term Agencies, T-bills and other short-term negotiable instruments (a category that includes short-term Agencies) increased by $52.6b (lines 10,11, 25 and 28).


But the FRBNY’s custodial holdings of Treasuries and Agencies increased by $127.6b between the end of December and the end of March.   


$75b is a rather significant difference. 


The Treasury usefully explains how such a discrepancy is possible:

“The TIC system of monthly net purchases or sales of long-term securities is specifically designed to capture only U.S. cross-border transactions. If a foreign official institution acquires a Treasury security from a private foreign entity on a foreign securities exchange and then has the security held in custody at FRBNY, reported custody holdings will increase. However, there will not be a corresponding TIC-reported foreign official purchase because this is not a U.S. cross-border transaction: it is a foreign-to-foreign transaction. Note that when the Treasury security first was acquired by the private foreigner, there would have been a U.S. cross-border transaction reportable in the TIC system but it would not be recorded as a foreign official purchase, nor would it necessarily be recorded in the same calendar month or against the same country as the movement into custody at FRBNY.”  (Emphasis added) 

It is safe to say that a lot of the UK’s purchases of Treasuries are done for official institutions.  Every survey over the past few years has led to a big downward revision in the UK’s holdings (and an upward revision in China’s holdings) – look at the data for June.

And I think it is also safe to assume that total official flows to the US in q1 totaled at least $161.7b, if not a bit more.    $161.7b is the rise in FRBNY’s holdings plus the change in deposits and other non-custodial liabilities and increase in official holdings of corporate bonds from the TIC data.  No double counting.


That is a lot.   And it may still understate total official flows.  My own estimate of dollar reserve growth – one derived from my estimate of total reserve growth -- is running closer to $200b.


The other story in the March data?   The big rise in US purchases of foreign securities.   US residents bought about $40b of foreign securities, including an usually large amount of foreign debt -- $32b. 



That is one reason for the dollar’s weakness.   



It also explains the weak total TIC flow number in March.  The $100b in headline foreign purchases of US debt and equities is deceiving.  Net inflows were a bit under $50b – less than the March current account deficit ($75b or so)


If sustained, that level of “diversification” by US residents implies rather large outflows – about $500b a year.    To finance that level of outflows and its current account deficit, the US would need to attract about $1400b in inflows.   



That is a lot.  It might imply the US would need a bigger credit line than even the People’s Bank of China is willing to provide.   Financing the United States current account deficit is one thing.    The current account deficit is the counterpart to China’s current account surplus (read export jobs).   Financing capital flight (i.e. portfolio diversification) by US residents is another …  


Two small additional notes.

  • Korea remains on my diversification watch, but the evidence isn’t clear.  Its (net) sales of long-term bonds in q1 were largely matched by a rise in its short-term claims.  It, though, clearly is shifting away from Treasuries toward higher-yielding instruments.  
  • Norway continues to complicate the data.  It sold $22.4b of long-term US debt (mostly treasuries) while adding $17.1b to its short-term claims.   Or so the TIC says.  In reality, this is probably tied up with some complicated options strategy designed to increase Norway’s income from its (relatively small) true holdings of US treasuries.

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