from Follow the Money

Yet more evidence that emerging markets cannot create the financial assets their citizens want to hold …

January 23, 2007

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If I am doing my math right, Chinese citizens added RMB 4.83 trillion (around US$ 620b at 7.8 RMB to the dollar) to their RMB-denominated bank accounts over the course of 2006.   It seems like more and more Chinese are putting their savings in the bank (rather than holding onto cash) at a time when the PBoC is injecting a lot of "liquidity" into the local economy.  During that same time Chinese citizens reduced their holdings of domestic dollar deposits by RMB 0.033 trillion (around US$4b) even though dollar interest rates exceed RMB interest rates.   Not exactly strong evidence that Chinese private savers are desperate for dollars …

China is trying to restrain domestic Chinese investment in its frothy domestic stock market even as it loosens restrictions on capital outflows and tightens restrictions on capital inflows.  

Domestic Chinese savers just don’t seem that keen on keeping the dollar share of their portfolio constant.   Come on guys, trendy modern economic theory says that a falling dollar is a reason to increase your dollar holdings – and the out-performance of the Chinese stock markets is a reason to increase your holdings of US stocks.  Get with the program!

China’s banks haven’t been able to match their surge in deposits with a surge in lending.  If my math is right, Chinese bank loans increased by RMB 3.18 trillion (around US$ $405-410b) in 2006.   But don’t blame the banks.  They were more than willing to lend out their surging deposit base.  The central bank just wouldn’t let them. 

And if any one can provide a detailed accounting of what China’s banks did with the RMB 1.65 trillion (around US $210b) that they didn’t lend out, I am all ears … 

Some of it is on deposit with the central bank as a result of rising reserve requirements, and some has been used to increase the banks holdings of PBoC sterilization bills.  I also wouldn’t be surprised if some RMB has been swapped with the central bank for dollars … but that is just a hunch.

It probably isn't a coincidence though that the gap between the banks deposits and te banks lending roughly matches both China's fx reserve growth and its current account surplus.  The savings of the good burghers of Shanghai that are not being lent out in China are being lent to the US, with a bit of help from the central bank.

China, incidentally, isn’t atypical.    Brazilian private savers haven’t been willing to shift enough money out of Brazil to offset foreign demand for Brazilian real-denominated assets (and Brazil’s own current account surplus).    That is why Brazil’s reserves are rising rapidly.  They were up $32b in 2006.

And Russian savers also seem increasingly willing to keep their savings in Russia.  

Russia just released its (preliminary) 2006 balance of payments data.    Its reserves (flow basis) are up by $107.5b, more than its estimated $95.6b current account surplus. 

But that isn’t all.   The government repaid $29b in debt, and the central bank repaid another $7b.   Combine the fall in Russia’s debts with the rise in the central bank’s assets, and Russia’s government generated a net $143.5b outflow. 

That implies large net private inflows into Russia.

And they aren’t that hard to find in the balance of payments.   Net inflows to Russian banks totaled $25b in 2006, up from $6b in 2005.  Net FDI and portfolio flows totaled $27b in 2006, up from $0.5b in 2005.    No doubt some Russians are continuing to move their savings abroad (though increasingly they seem to be holding euros and pounds rather than dollars), but those outflows have been more than offset by private capital inflows. 

Ruble deposits in Russian banks are way, way up. Look at M2 growth.

Indeed one of the big (underreported) stories of the past few years is how savers in emerging markets are increasingly willing to hold their savings in the local banking system in local currencies despite low nominal interest rates (China) or low nominal and negative real interest rates (Russia).   It has been better to get low returns in the local bank than to hold (depreciating) dollars.

Foreign investors -- private investors that is -- have also been quite keen to put funds into emerging market financial assets.   

That is the basic problem I have with all theories that attribute the uphill flow of capital to financial underdevelopment.  Right now, emerging markest don't seem to be having any trouble generating financial assets that their citizens want to hold, or that foreign investors find attractive.   The big outflows from the emerging market are all coming from ... drumroll please ... the official sector. 

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