The mystery of the massive dollar surplus in China baffles global markets – News Couple

The mystery of the massive dollar surplus in China baffles global markets

(Bloomberg) — Unprecedented trade surpluses and record bond market inflows are giving China a stockpile of dollars not seen since the days when an ‘Asian savings glut’ was blamed for keeping US interest rates so low and fueling the sub-prime mortgage crisis. .

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But unlike at the time, when China aggressively recycled its dollar holdings into US Treasuries, China’s giant pile of foreign-exchange reserves remains broadly stable. This means the dollars are being funneled elsewhere, but exactly where that proves to be a bit of a mystery.

While some of this influx of US currency ends up as deposits in Chinese banks, significant “errors and omissions” in the country’s balance of payments confuse the picture. What is clear is that the dollars provide China with important protection against any future shocks in the global economy, even as individual companies such as the China Evergrande Group struggle to repay their debts.

“It is very difficult to get a clear view of how to recycle China’s current account surplus,” said Alvin Tan, head of foreign exchange strategy in Asia at RBC Capital Markets in Hong Kong. However, the dollars mean that “whatever economic challenges China faces, there is little risk with regard to either the balance of payments or the external debt problem.”

Banks’ foreign currency deposits are close to a record $1 trillion, while the trade surplus in the first nine months of this year was about $440 billion compared to the 2015-2019 average of $336 billion and $325 billion in 2020, according to Morgan Stanley estimates.

At the same time, the aggressive Covid-zero policy has closed the country’s borders and kept millions of Chinese tourists and their savings at home.

Some analysts argue that the booming current account has allowed policy makers in China to rein in massive amounts of debt and launch a long-awaited campaign to weed out this year’s faltering real estate sector. But this leaves a question as to whether America’s demand for goods will maintain enough momentum to offset the effects of slowing credit growth in China.

“Chinese macroeconomic policy has become a big bet on growth in the US as it attempts to replace its credit motive with current account,” John Turek of JST Advisors wrote in a recent paper. China has tightened credit while the external account surplus has vanished. This allowed China to import aggregate demand that it had been “sacrificing” by lowering credit growth.

Most since 2014

The State Administration of Foreign Exchange released balance of payments data for the third quarter on Friday. They proposed “the fastest build-up of reserves since early 2014,” Goldman Sachs analysts wrote. This is one outlet for surplus dollars, although official reserves as of September were lower than at the beginning of the year.

Economists expect China to run another trade surplus when it releases October data on Sunday, this time to the tune of about $64 billion.

China’s current account – a barometer of trade and investment – slid into negative territory in the first quarter of 2018 for the first time since it joined the World Trade Organization in 2001, raising questions about what that means for capital flows around the world. It sank into the red again in the first quarter of last year, when coronavirus restrictions shuttered factories, but has since rebounded as Chinese export engines return to full speed.

One consequence of the dollar influx is the continued strength of the yuan – it has been the best-performing currency in Asia this year against the dollar. But that’s not enough to explain what happens to all those dollars.

One possibility is that companies have left a significant portion of their foreign trade receipts overseas, said Becki Liu, head of overall China strategy at Standard Chartered.

“This means that the increasing foreign exchange holdings are primarily owned by the private sector, not the public sector,” she said.

She said the increased holding of foreign currency assets by Chinese private sector entities, rather than their flow to the public sector, would help reduce market volatility and prepare China for more openness in its capital account.

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“We still expect China’s exports to remain strong, although annual growth may slow, while international travel restrictions will remain largely in the next quarter or two, so the pattern of massive current account surpluses in China must be maintained.”

David Koo, Chinese economist

Huang Yiping, a former member of the Monetary Policy Committee of the People’s Bank of China, said in an interview with Bloomberg TV that the current account surplus is likely to retract from such high levels as exports decline over time.

“I think this huge current account surplus is abnormal,” he said. “Once the pandemic is over, we should expect some normalization of these numbers.”

For now at least, the dollars keep coming in.

Goldman Sachs estimated net inflows of about $14 billion for September, well above the $5.5 billion recorded in August, buoyed by a goods trade surplus and foreign purchases of more Chinese bonds.

Analysis by Stephen Gein, who runs Eurizon SLJ Capital, a hedge fund and advisory firm in London, shows that China’s trade surplus operating rate is close to $600 billion annually, which if maintained would become the second-highest. He points out that the balance of payments has flowed the same way since it was recorded in 2007.

Other theories about recycling dollars include Chinese companies investing abroad or using the cash to fund projects such as those linked to the Belt and Road Initiative.

“The epidemic has caused huge distortions in the world, one of which is a very large trade surplus in China,” Jin wrote in a note. Long-Covid has to mean that such a flooded trade surplus should take time to clear up.

(Updates with reference to reserves in the paragraph after the subheading “Most since 2014”.)

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