Foreign Reserves’ Hesitant Heft
The IMF released last quarter 2017 global reserve figures, with China now fully added to the mix to cover 90% of the outstanding total, showing a 6% $800 billion increase since end-2016, half due to currency fluctuations against the dollar. GDP growth rose to 3% and bank deleveraging and commodity price retrenchment bottomed over the period, with private emerging market capital flows turning positive and central banks intervening again against appreciation. From 2014-16 holdings dropped $1.5 trillion, but JP Morgan forecasts for this year and next are for just $150-200 billion incremental addition. The current account surplus may not budge on “trade war” outbreak and flat remittances, and rising advanced economy interest rates will divert portfolio investment. Asia with $5.7 trillion, half the world accumulation, led the regional recovery, with China’s over $3 trillion pool still $1 trillion off the previous peak. India, Indonesia, Singapore and Thailand swelled more, while in Europe Russia came back to $350 billion and in the Gulf shrinkage continued the past year but at a negligible $30 billion, one-tenth the preceding loss. Dollar weakness across-the-board in 2017 aided the rebound, but authorities are likely to interfere less in exchange rates in the future to avoid “manipulation” charges from the new US administration. The IIF’s high-frequency indicators through the first quarter in turn suggest neutral debt and equity allocation to major developing markets. By the traditional yardsticks of short-term debt repayment and four months import coverage, these countries have excess reserves, but the IMF recently introduced more nuanced metrics which reveal China in particular as barely above adequate. It points to the money supply buildup to support capital controls as eroding the cushion, and by the updated methodology South Africa and Turkey are in danger and positions are insufficient in Hong Kong and Singapore although they are at the same time offshore financial centers. The dollar and euro have respective 65% and 20% shares, but they continue to slip against other units, although the renimbi portion remains meager at 1%. With “A” share entry into the benchmark MSCI index this June, alongside wider Hong Kong connect access and local bond and investment bank opening, reserve manager deployment should grow, and a 5% take rivaling the UK pound and Japanese yen is possible at end-decade according to analysts.
Foreign investors trimmed securities exposure as Washington and Beijing entered talks to avoid reciprocal tariff imposition, and the Yuan softened ahead of potential negotiation-related adjustment. The Politburo prepared to receive Treasury Secretary Mnuchin and Trade Representative Lightizer as it hewed to stable growth with “proactive” fiscal and neutral monetary policies. Banks reported 5% profit improvement in Q1, as their piece of total social financing again reached 90% from a decade ago before the “shadow” competitor craze. The insurance regulator tightened rules on short-term products and the central bank imposed guarantee and leverage limits on asset managers as it put household debt at 50% of GDP, mostly in mortgages. 40% of loans have gone to property so far this year with average rates rising to 5.5%, as national home sales fell 10% in April with developers scrambling for their own reserves.
