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

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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

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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."

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. @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)

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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

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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)

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The proxies for Chinese foreign currency intervention in February have been released, and they continue to paint a contradictory picture. The PBOC's balance sheet reserves rose (implying dollar buying), while the broader fx settlement data shows continued sales

1/ Either way, the volume of purchases (for the PBOC balance sheet) or sales (in settlement) is modest relative to the trade balance; there isn't significant pressure (unless something is happening off balance sheet)

2/

Novo Nordisk:

a) pays income tax at the Danish corporate tax rate -- an effective tax rate of 20% v the 22% headline rate ...
b) pays the bulk of its global income tax in its home country (Denmark)

1/x

https://twitter.com/ZorkaMilin/status/1767731193632452830

Like most US pharma companies, Novo Nordisk actually gets the bulk of its revenue (` 60%) from the US (North America)

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Rather amazing that so many large US pharmaceutical companies are struggling to make money in the United States after the Tax Cuts and Jobs Act.

Four big companies reported losing money in the US, while making a decent sums abroad

1/x Since these companies don't "report" making any money in the US (despite high US prices), I guess it is is natural that they don't pay any tax in the US.

(Abbvie does pay a bit of GILTI on its Bermuda profit but that is it ...)

2/

A rather surprising fact from the Fed's flow of funds:

Foreign demand for long-term US Treasuries (just over $450b) exceed the Treasury's net issuance of l-term Treasuries (just over $400b). That hasn't been the case for a long-time. & it wasn't the expectation for 23

1/ Of course, with the Fed's Quantitative Tightening the net supply of notes and bonds that the market had to absorb was larger than the Treasury's issuance.

(and note the foreign demand did not come from China either)

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The Wall Street Journal is highlighting the risk of a second China shock -- which I think is fair. China' strategy for overcoming the legacy of its property boom seems to be exports of advanced manufactures.

But to some degree, the second China shock has already happened.

1/ China's surplus in manufactures has gone from about $1 trillion to $1.75 trillion or so in short order -- and after some consolidation in 2023, it seems poised to grow further ... and certainly doesn't look to be returning to pre-pandemic levels

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A chart that illustrates how it is fundamentally impossible for China to construct a block centered around the developing world that replaces the US/ EU ...

there is an obvious problem, namely the size of China's surplus

1/x

https://twitter.com/michaelxpettis/status/1762345913270313362

Here is the same chart without China -- it looks totally different. That's the point.

Note one other thing: the big deficits are in India and Turkey.

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To make a point that Michael Pettis also makes, China is going to have trouble "reshaping global trade on its own terms" so long as the US and the EU are the ultimate course of most of its trade surplus

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ft.com/content/c51622…
The countries in China's RCEP all run global surpluses (or at least most do). So in addition to being a rather thin agreement, it isn't actually close to a self contained block.

Some for now is true of any CNY payments network along the BRI ...

2/

ft.com/content/c51622…