1/10
Russell Napier correctly points out that China is facing a classic developing-country problem, which is that foreign financial inflows are self-reinforcing, so that once they are large enough relative to reserves, they can become destabilizing.
ft.com/content/7a1cbb…
Russell Napier correctly points out that China is facing a classic developing-country problem, which is that foreign financial inflows are self-reinforcing, so that once they are large enough relative to reserves, they can become destabilizing.
ft.com/content/7a1cbb…
2/10
This is because large inflows put upward pressure on the currency and on domestic asset prices, which in turn encourage further inflows. These inflows force up either the currency or the domestic money supply to higher levels than the authorities would like.
This is because large inflows put upward pressure on the currency and on domestic asset prices, which in turn encourage further inflows. These inflows force up either the currency or the domestic money supply to higher levels than the authorities would like.
3/10
At some point, however, the combination of very high prices, loose money, and some external shock can set off outflows that also become self-reinforcing, but much more violently so.
At some point, however, the combination of very high prices, loose money, and some external shock can set off outflows that also become self-reinforcing, but much more violently so.
4/10
In that case if the PBoC tries to stabilize the RMB, it can only do so by selling dollars and sharply contracting the money supply at a time when falling domestic asset prices require monetary expansion.
In that case if the PBoC tries to stabilize the RMB, it can only do so by selling dollars and sharply contracting the money supply at a time when falling domestic asset prices require monetary expansion.
5/10
Napier is right to worry about this problem (the PBoC is worried too), but where I disagree with him is in the timing. He worries that foreign holdings are now large enough that they have become a serious risk.
Napier is right to worry about this problem (the PBoC is worried too), but where I disagree with him is in the timing. He worries that foreign holdings are now large enough that they have become a serious risk.
6/10
He cites $2.1 trillion of foreign holdings versus $3.2 trillion of reserves, arguing that if foreigners hold liquid securities equal to two-thirds of reserves, China has already become excessively vulnerable to changes in sentiment.
He cites $2.1 trillion of foreign holdings versus $3.2 trillion of reserves, arguing that if foreigners hold liquid securities equal to two-thirds of reserves, China has already become excessively vulnerable to changes in sentiment.
7/10
I don't think this has happened yet. By my count foreigners hold roughly $500 billion of Chinese stocks and $600 billion of Chinese bonds, and at least part of the latter is held by foreign central banks, who tend not to be hot money investors.
ft.com/content/9f281d…
I don't think this has happened yet. By my count foreigners hold roughly $500 billion of Chinese stocks and $600 billion of Chinese bonds, and at least part of the latter is held by foreign central banks, who tend not to be hot money investors.
ft.com/content/9f281d…
8/10
China's reserves, on the other hand, consist of $3.2 trillion of official reserves plus $1.1 trillion of "indirect" reserves that banks were forced to buy on behalf of the PBoC.
China's reserves, on the other hand, consist of $3.2 trillion of official reserves plus $1.1 trillion of "indirect" reserves that banks were forced to buy on behalf of the PBoC.
9/10
There is also another $1.1 trillion at the CIC that could be deployed in a pinch. By my count, in other words, foreign holdings of liquid Chinese securities are equal to 20-25% of reserves. This isn't a negligible amount, but it is still manageable.
There is also another $1.1 trillion at the CIC that could be deployed in a pinch. By my count, in other words, foreign holdings of liquid Chinese securities are equal to 20-25% of reserves. This isn't a negligible amount, but it is still manageable.
10/10
While another year or two of this level of inflows will certainly become worrying, for now I think the risks are still pretty limited, especially as there is little sign that China's huge trade surpluses are likely to disappear any time soon.
While another year or two of this level of inflows will certainly become worrying, for now I think the risks are still pretty limited, especially as there is little sign that China's huge trade surpluses are likely to disappear any time soon.
• • •
Missing some Tweet in this thread? You can try to
force a refresh
