I generally am a fan of the Economist.

But they (perhaps echoing the IMF?) made a common error in attributing the fall in FDI after 2017 to "deglobalization"/ rising tensions with China



1/ economist.com/special-report…
The swing in 2018 is in fact a function of the OECD BEPS reforms and the US tax cuts and jobs act, which led to a huge unwind of "special purpose entities" in European "financial" (umm ... tax) centers

the sign changed and the swing was huge.

2/

Joseph Cotterill of the FT seems keen on Sri Lanka’s macro linked bond.

I am not. Three (major) problems not mentioned in the FT article:

1) It is linked to the wrong variable;
2) The payoffs are asymmetric;
3) It doesn’t generate debt sustainability

1/ many First issue. Linking to the wrong variable: dollar GDP.

Sovereign debt tourists think in fiscal terms. I hoped sophisticated bond holders would know better. The IMF even more so. But no. The debate now is all about index eligibility.

2/

ft.com/content/c53070…

"“We immobilised the assets together; we would like to mobilise them together as well" - Daleep Singh, White House deputy national security adviser.

Important point from Mr. Singh, & a very important chart from the FT in their Big Read on the freeze v. seize debate

1/ Note two things about the chart:

a) There is a clear upward trend in Euroclear's profit on the frozen reserves (as bonds roll off into a deposit account)
b) The q4 profit was EUR 1.5b, or EUR 6b annualized

2/

ft.com/content/0d77f5…

Let me build on this @michaelxpettis thread.

China's reserve manager almost certainly doesn't currently hold the bulk of the dollar assets held by China's state sector, let alone by all Chinese residents

1/x

https://twitter.com/michaelxpettis/status/1785893007725572097

SAFE has disclosed that it diversified its formal reserves away from dollar (going from 79% in 05 to 59% in 15 -- and the latest data point is ~ 58% but it is very lagged). So SAFE maybe holds $1.8-1.9 trillion of its formal reserves (and other f. assets) in USD

2/

American pharmaceutical companies are apparently running a low margin business in the US -- very modest (reported) profits relative to their US sales, and smaller reported US profits than before the TCJA.

(from work in progress with @Mike_Weilandt)

1/ Indeed, since the passage of the TCJA (the pharma tax cuts and Irish jobs act according to one pundit) US pharma companies have reported less profit in the US and more profit abroad

2/

A reminder that the vast majority of Treasuries held by foreign central banks have a maturity of 5 years or less --
Last data point here is from mid 2023, tis from the latest survey of foreign portfolio investment in the US Given the inverted curve I was expecting more evidence that foreign official investors had shortened the maturity of their Treasury portfolio.

Why doesn't Japan just let the yen float (even further) down? One answer shouldn't be a surprise to any American who has observed just how much Americans care about the price of oil --

1/

(chart thanks to @Mike_Weilandt) There seems to be an asymmetry around a lot of commentary around intervention. Dollar sales generate a lot more attention that dollar purchases (and the compounding of interest income on accumulated assets)

2/

FX settlement data for March shows the first sign of significant pressure on the yuan -- roughly $30b in fx sales in settlement. Contrasts with $7b rise in in balance sheet fx reserves

Settlement v balance sheet gap is big.

1/ The settlement v PBOC balance sheet gap (which should correspond in theory to fx sales from the state banks) is also large in the trailing 12m (captures activity over the last year)

2/

A lot of political reporting still casually equates the interest of (German) business operating in China with the interest of the Germany economy. Politico for example ...

1/ The same applies to arguments that link Tesla's production in China and its exports from China to the success of the US economy (as opposed to a US company). The confusion isn't limited to Germany

2/

politico.eu/article/why-ge…

I was on NPR yesterday, highlighting just how little US tax the major US pharmaceutical companies pay



1/npr.org/2024/04/12/124… Large US revenues typically do not generate any taxable US profit (thanks to profit shifting)

2/

The peg that cannot be named ...

A new blog, on, well the not-so-flexible yuan

1/

cfr.org/blog/chinas-ne… I was worried last night that China might change its fx regime before I finished my assessment of China's policy over the last 6ms. But I need not have worried.

The so called "market determined" fix stayed constant last night, and tonight (US time)

2/

Via George Magnus, a new Kiel institute study on China's industrial subsidies.

Highlights that most subsidies come from cheap funding (below market debt and equity) not direct government spending

1/

ifw-kiel.de/fileadmin/Date… A key point

"A distinctive feature of purchase subsidies for BEV in China, however, is that they are paid out directly to manufacturers rather than consumers and they are paid only for electric vehicles produced in China, thereby discriminating against imported cars”

2/

So, well, game on --

Liao Min (who is widely respected in the US) pushes back against Janet Yellen's criticism of Chinese industrial and macroeconomic policies.

1/x

https://twitter.com/ZichenWanghere/status/1777342316359074014

Personally find it sort of amusing that Liao Min (representing the CCP) cites two " @ business " (note the irony) stories -- including one whose headline I thought didn't fairly represent the underlying data.

2/

Was kind of surprised by this: China's holdings of US financial assets, as a share of China's GDP, are back down to where they were when China joined the WTO ...

1/ Lots of reasons for this: GDP has gone from $1-$1.5 trillion to $17-18 trillion, dollar share of reserves is down a bit, etc.

But one big reason is what China moved $2 trillion of fx out of its reserves and into its banks!

2/

thechinaproject.com/2023/06/29/sha…

There is now a bit of pushback against concerns about Chinese overcapacity. That is in part because the notion of overcapacity is itself poorly defined (capacity v domestic demand, v global demand or v the demand needed for decarbonization)

But there is a real issue imo

1/x Take steel - a sector where China accounts for 50-60% of global production and something like 50% of global demand. Chinese steel exports are modest relative to domestic production and domestic use (even now -- note the data series for domestic use may be off)

2/

Lot of talk about the dollar as a US superpower.

What's undeniably true is that the US is especially good at exporting its debt securities, and uniquely bad (relative to its European and Asian peers) at exporting manufactures ...

1/ It runs against most scare narratives around the US bond market, but foreign inflows into US long-term debt have been strong recently -- nothing like before the GFC, but once again the main funding source for the US trade deficit

2/

I have strongly argued that the narrative around China's Treasury sales in 2022 and the first half of 23 was overstated (valuation changes were equated with sales).

But it is important to be open-minded. China just released data showing its end 2018 USD reserves share ...

1/ The data is super lagged, but it did tick down ever so slightly (the dollar reserve share hasn't been above 59% since the lagged disclosure in SAFE's annual report started)

2/

safe.gov.cn/en/AnnualRepor…

At current exchange rates, Tesla has a strong economic incentive to use China as an export base -- absent trade barriers.

"Teslas cost significantly less to make in Shanghai than elsewhere, a key saving when the company is in a price war with its competitors"

From the NYT

1/ Made in China Tesla's have huge amounts of Chinese content (including Chinese batteries)

"Tesla also created a market for Chinese suppliers, saying recently that 95 percent of components used in the Shanghai factory are locally sourced."

2/

. @edwardwhitenz of the FT is on a bit of a roll -- really good reporting on China's auto sector

"Last year, China produced 17.7mn cars with internal combustion engines, a 37 per cent fall from 28.3mn in 2017."

1/x China still has the capacity to produce ~ 28m ICE cars by the way, give or take. Which means it has a very elastic capacity to meet global demand for ICEs if allowed (lots of that capacity is in JVs who make globally sellable designs)

2/

Robin is posting some very good material on EM fx intervention these days.

Especially agree with his observation that for many Asian economies (&Turkey) looking at the disclosed forward book is critical.

1/

https://twitter.com/robin_j_brooks/status/1770441060159795611

A couple of additional observations --

(1) a major reason why official reserve growth has slowed (other than Robin's point that intervention is a function of dollar weakness) is the increased use of state banks and SWFs to warehouse the fx from fx management/ resources

2/

I see that some folks are still trying to infer flows into the US Treasury market by looking at changes in the market value of the stock of foreign holdings of US bonds. That doesn't work -- the US has actual data here, and it showed (surprisingly) strong inflows in 2023

1/ The "Belgian" (Euroclear) adjustment doesn't impact total flows, only the split between China and the rest of the world. The overall data shows an increase in foreign demand for US bonds in q4 (as the market turned)

2/