Thread by @Brad_Setser

The Trump Administration wants the yuan to remain stable.

Limiting portfolio inflows into China's bond (and stock) markets isn't the most obvious way to achieve that goal.

1/x

ft.com/content/a263d2…

About $80b flowed in China's bond market from the world this past year -- down a bit from the Russian reserve diversification driven peak.

Directionally that helps support the yuan.

2/x

But it actually isn't decisive

Chinese investors also bought about $45b of foreign bonds, the net inflow was only around $30b. That's modest v China's current account surplus (now close to $200b), very modest relative to China's still large stock of foreign assets.

3/x

The growth in US holdings of Chinese bonds after index inclusion appears rapid, but it is coming from an incredibly low base ...

4/x

Reported US holdings of Chinese bonds (which may not capture all US exposure for data reasons) of $10-15b are trivial relative to the world's total holdings of Chinese bonds.

The US acting alone here won't have any real impact imo

5/x

Delisting of Chinese firms that have already listed in the US on the other hand would really matter --

Blocking new listing? Much easier to do, but much less of an impact

6/x

Some argue that the US has leverage because China needs US financial investment. I am not at all convinced. China has plenty of domestic savings -- its problem has been putting that to good use. It doesn't need to import savings

7/x

cfr.org/blog/chinas-co…

and China's current account surplus has been rising (along with China's trade surplus) this year --

China is on net still a capital exporter.

8/8