The PBoC announced that total reserves as of the end of March were $1.68 trillion, for total growth of $153.9 billion during the first quarter (compared to $94.6 billion in the last quarter of 2007).I think this is a record quarter, and there is a strong case to be made that the total amount would be about $22 billion higher except that commercial banks may have been asked to redenominate into dollars part of their January increase in minimum reserves – which has no impact on the money supply but does lower headline reserves.
The monthly breakdown, for those who care, is $61.6 billion in January, $57.3 billion in February, and $35.0 billion in March.These are not official numbers, but they are based on usually reliable quotes from earlier this year.
As I noted in yesterday’s entry, the trade surplus accounted for $41.6 billion of that total while FDI accounted for another $27.4 billion.That sums to $69 billion.Roughly 30% of PBoC reserves are presumed to be held in currencies other than the US dollar, so the weakness in the dollar added to headline reserve growth – I am only guessing but my quick-and-dirty calculation suggests perhaps $30 billion or so. Add another $15 billion to account for interest received on the securities held. That takes us all the way up to $115 billion.There is still nearly $40 billion that needs to be accounted for.I am sure it is not all hot money, but it seems pretty obvious that the FDI numbers, and perhaps even part of the trade numbers, include speculative inflows. There is a lot of money coming into China and even a global slowdown is not going to make the country’s monetary policy easier to manage.
Since I have to teach class in five minutes, I will postpone any further discussion, especially as I would like to talk to a few friends to see what else we can know about this number. Needless to say this is a huge number, but I guess I am becoming a little numb to big numbers.Of course this makes me all the more convinced that inflation is not going to peak as soon as most people in the market seem to believe – everyone I have been reading recently is arguing that inflation will peak in the next three months, and then drop in the second half of the year. I not very confident that will happen.
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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November, 2007
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