Yesterday the PBoC raised minimum bank reserve requirements for the seventh time this year from 12.5% to 13.0%. Needless to say the market subsequently rose.
In related news, the PBoC reported that its reserves had grown by $101 billion in the third quarter to $1.43 trillion. I am not sure how much money has been extracted for the CIC, so I don't know what the real increase was. Brad Setser estimates that valuations gains on their portfolio of euro and yen paper accounted for about $20 billion of that increase. Add $73 billion for the quarter's trade surplus and another $15 billion for estimates of the rest of the current account (again Brad Setser's estimate), and it adds up to $108 billion.
What's missing? Inward FDI (running at about $15-17 billion per quarter), net hot money flows, and outward FDI. If ownership of Central Huijin has already been transferred to the CIC, that would mean that "real" reserve increases were $67 billion higher, and if the $3 billion for the Blackstone investment were also transferred, then the real increase in PBoC reserves would be $171 billion, but I am not yet sure about the numbers.
In completely unrelated news, Sotheby's had its first major auction since the subprime crisis broke. Eight paintings by living Chinese artists were sold, four of them well above their high estimates. Although there were also paintings on offer by Damien Hirst, Francis Bacon, Richard Prince, Ed Ruscha and Indian artist Shaw, the highest price went to China's Yue Minjun, for "Execution", a 1995 painting of laughing men in underwear. It was sold for 2.9 million pounds.
Also missing and starting to be less trivial: QDII outflows. And, repatriated profits out (circa $60 bb 2006, so figure north of $20 per quarter this yr I thnk). Dan R
By DHR - 10/14/2007 9:19 PM
Yes, the QDII is becoming material, which is what I meant about net hot money flows, although I guess QDII is not necessarily "hot" since it can be controlled.
By Michael Pettis - 10/15/2007 11:25 AM
To the best of my knowledge, Huijin isn't counted as CBank reserves (reserve growth in the quarters where reserves were shifted to huijin are noticeably low) -- so the shift from Huijin to the CIC would move funds already off the PBoC's balance sheet around rather than reduce reservse. But the CIC could still have bought additional reserves from SAFE. Indeed, that seems likely -- the quanities are unknown.
the other big unknown, apart from QDII, is swaps with the banks. there was a $100b increase in "private" chinese holdings of foreign debt in 06, largely financed with funds the banks borrowed from the PBoC. Some of this money likely came back to the Pboc in 07, but we don't yet know how much or the timing. If anyone has solid data, I am all ears.
Michael Pettis is a professor at Peking University's Guanghua School of Management, where he specializes in Chinese financial markets. He has also taught, from 2002 to 2004, at Tsinghua University’s School of Economics and Management and, from 1992 to 2001, at Columbia University’s Graduate School of Business. He is a member of the board of directors of ABC-CA Fund Management Co., a Sino-French joint venture based in Shanghai.
Pettis has worked on Wall Street in trading, capital markets, and corporate finance since 1987, when he joined the Sovereign Debt trading team at Manufacturers Hanover (now JP Morgan). Most recently, from 1996 to 2001, Pettis worked at Bear Stearns, where he was Managing Director-Principal heading the Latin American Capital Markets and the Liability Management groups. He has also worked as a partner in a merchant banking boutique that specialized in securitizing Latin American assets and at Credit Suisse First Boston, where he headed the emerging markets trading team. Besides trading and capital markets, Pettis has been involved in sovereign advisory work, including for the Mexican government on the privatization of its banking system, the Republic of Macedonia on the restructuring of its international bank debt, and the South Korean Ministry of Finance on the restructuring of the country’s commercial bank debt.
Pettis is a member of the Institute of Latin American Studies Advisory Board at Columbia University as well as the Dean’s Advisory Board at the School of Public and International Affairs. He is the author of several books, including The Volatility Machine: Emerging Economies and the Threat of Financial Collapse (Oxford University Press, 2001). He received an MBA in Finance in 1984 and an MIA in Development Economics in 1981, both from Columbia University.
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December, 2007
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