2012-06-04

Chinese foreign reserves to peak in 2014? What about within the next year?

This is good analysis from Nomura about changes in the Chinese economy. Where I differ is that I do not believe this will be a smooth transition.

China’s FX reserves: the coming peak
Nomura has called the top: $3.68tn at the end of 2014, up from a mere $150bn at the start of 2000. China’s reserves will then start to decline, albeit gradually, in 2015.

More than just a curious milestone, this process of peaking out will have important consequences for everything from Chinese monetary policy to US Treasury yields.

Forecasting Chinese foreign exchange reserve growth is no easy task. There are many moving parts at play in the balance of payments, the key channel for accumulating reserves. These include the current account, foreign direct investment and investment portfolio flows.

Rob Subbaraman and Zhang Zhiwei, two analysts with Nomura, have done the legwork and lay out in detail why they think China’s balance of payments will swing to deficit by 2015.
Long story short: China's domestic economy grows, FDI slows and Chinese investors go abroad. When the global economy gets growing again, this analysis will be correct, but in the meantime, events will unfold very haphazardly. Whereas they expect higher Treasury yields, I think we will see China's central bank selling Treasuries into a strong market that pushes interest rates even lower. Chinese selling will come from pressure on the renminbi, not from strength. It may be a policy of choice to depreciate the renminbi against a rapidly appreciating U.S. dollar, or it may be forced upon them by massive Chinese buying of U.S. assets.

To put an exclamation point on why I disagree with the timeline and smoothness of their forecast:


They are extrapolating existing trends. A smooth line assumes smooth sailing for the global economy.

A Chinese translation of the article: 中国外汇储备2014年将见顶

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