Thursday, 30 December 2004

Who's financing the US

Brad Setser continues to look at who's financing the US.

How Europe finances the US
Europeans invest in emerging Asia... Rather than financing a current account deficit in emerging Asia, the capital inflow from Europe finances reserve accumulation in emerging Asia. Most of those reserves are invested in US dollars. The net effect: ... the central banks of Asia -- not Europe's private investors -- get stuck with the risk that the dollar will fall v. emerging Asian currencies... Sustaining the current pattern of global growth requires that Asian central banks subsidize both European private investors and Asian exporters...

Look who is supporting the mortgage market ...
No Surprise: the People's Bank of China. The PBOC has shifted from buying treasuries (03) to buying mortgage backed securities (04). From Reuters: "... Net foreign purchases of MBS were $242 billion in mid-2004, up $19 billion from year-end 2003 and $35 billion more than 2002, according to Inside MBS & ABS, a publication of Inside Mortgage Finance... The strong performance of the $4.5 trillion MBS market in 2004 can partly be attributed to buying from Asian portfolios and China's central bank in particular, according to Steven Abrahams, fixed income mortgage strategist at Bear Stearns..." You might say the recent surge in housing prices was made in China ... like many other gifts exchanged in the past few days.

Yes, many things now come from China. Which is why I find it slightly amazing that in the West, there is still a relative lack of awareness of events pertaining to China. For example, the Capital Chronicle admits to having had no knowledge of "the recent happenings involving China Aviation Oil" and its derivative losses until recently (see "Burnt by oil derivatives, CAO sits out market rally").

Americans especially would be well-advised to get to know their creditors better.


Admin said...

Hi Skeptical.

Guilty as charged - we couldn't and wouldn't claim to be specialists on Asian, much less Chinese or Singaporian equities.

In mitigation, some of Capital Chronicle's pieces do refer to the impact and role of asia's central bankers on the US current account deficit; as well as the absence of a high consumption rate across much of the region contributing to this. So we had comforted ourselves (until about 5 minutes ago) that there was some modicum of macro-economic understanding of asian factors in these articles.

But inevitably, given the self-description on the site, the focus is on the US and the UK.

Nonetheless, your point may be valid (although, having served as your example, it looks overstated to our eyes). There is always more to learn and not only for Americans. Canadians, the English as well as West Indians (that is, the Capital Chronicle writers) might also benefit.

In any case, it's nice to be read even if only for a dressing down. We'd even welcome a contribution to the site to set us right if you are up to it...

Regards & Season's Greetings,


lim said...


The point of the last two paragraphs is that the news flow in the Western media often doesn't give sufficient prominence to events in China -- and Asia generally -- that sometimes may have significant impact on western economies. By the same token, analyses often ignore the changed global environment resulting from a rising China -- and India for that matter -- thus potentially leading to wrong conclusions.

However, this is a point I've made several times before. Your post on Wednesday only served as a reminder of it. It was certainly not my intention to give a "dressing down" to the Capital Chronicle -- your mitigation is completely valid. My apologies if it came across the wrong way.

Looks like my New Year resolution will have to be to brush up my writing skills.

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