Guan Tao is a director of the China Chief Economist Forum and the global chief economist of Bank of China
Bullet point:
Global stocks and bonds have "doubled", the scale of international capital returning to the United States has decreased sharply, and the global dollar shortage has eased but is still at a high level.
Note: This article was published on February 21, 2024.
In 2022, in the face of the return of high inflation, the Federal Reserve started a catch-up interest rate hike, raising interest rates seven times and 425 basis points throughout the year. Tightening expectations pushed Treasury yields higher, with 3-month, 1-year, 2-year, 5-year and 10-year yields surging and 236 basis points, respectively, for the year. Affected by this, the global stock and bond "double kill", a large amount of international capital returned to the United States, and the world suffered a dollar shortage.
In 2023, as inflation falls, the Fed will slow down the pace of tightening, raising interest rates by 100 basis points four times throughout the year, and has skipped interest rate hikes since September, and in December, it hinted that the rate hike was over and would consider a rate cut. For the full year, the 3-month and 1-year yields rose 98 and 6 basis points, respectively, the 10-year yields were flat, and the 2-year and 5-year yields fell by 18 and 15 basis points, respectively. This indicates that in the past year, the short-end interest rate of US Treasury bonds has risen and the long-end interest rate has fallen. Affected by this, global stocks and bonds have "doubled", the scale of international capital returning to the United States has decreased sharply, and the global dollar shortage has eased but is still at a high level.
Net foreign holdings fell slightly, but U.S. Treasuries continued to be sought after
First, let's look at the situation in which foreign investors (hereinafter referred to as "foreign investors") hold and buy and sell US Treasuries, the anchor of global safe assets. According to the International Capital Flows Report (TIC) released by the U.S. Department of the Treasury, unlike the increase in volume and price in 2022, foreign holdings of U.S. bonds in 2023 will rise in both volume and price. As of the end of 2023, the balance of U.S. bonds held by foreign investors was US$8,056.1 billion, an increase of US$766 billion from a decrease of US$450.3 billion in the previous year, and both the balance and the increase reached a new high. Among them, the net ** U.S. debt was 670.8 billion US dollars, an increase of 6 percent less than the previous year4%, but it is the third largest in history, after 2008 ($772.4 billion) and 2022 ($716.6 billion), contributing 87% of the increase in foreign holdings of U.S. bonds6%；Benefiting from the decline in U.S. Treasury yields, the positive valuation effect was $95.2 billion, contributing 22.2%.4%, which was affected by the surge in U.S. Treasury yields last year, recorded a negative valuation effect of $1,166.9 billion, a new historical record.
In the last two months of 2023, the balance of U.S. bonds held by foreign investors increased by more than $240 billion month-on-month, not because foreign investors increased their holdings of U.S. bonds significantly, but because of the accelerated decline in U.S. bond yields. During the same period, the yields of the aforementioned five maturities fell by 100 basis points, respectively, resulting in a cumulative positive valuation effect of $337.6 billion (the cumulative negative valuation effect in the first ten months was $242.4 billion), contributing 68.8% of the increase in foreign holdings of U.S. bonds during the same period7%。
In terms of investment varieties, foreign investors both increased their holdings of medium- and long-term and short-term U.S. bonds, with one increase and one decrease in the previous year. As of the end of 2023, foreign investors held US$6,973.4 billion in medium- and long-term U.S. bonds, accounting for 86.6% of foreign U.S. bonds0%, down 0 from the previous year4 percentage points; Holdings for the year increased by US$633.4 billion, compared with a decrease of US$412.9 billion in the previous year. Among them, the net ** medium and long-term U.S. bonds were 538.2 billion US dollars, down 28 percent from the previous year6%；The positive valuation effect was US$95.2 billion, compared with a negative valuation effect of US$1,166.9 billion in the previous year. During the same period, foreign holdings of U.S. Treasury bills increased by $132.7 billion to $1,082.7 billion, compared to net sales of $37.4 billion in the previous year (the valuation effect of U.S. Treasury bills trading is assumed to be zero). This reflects that foreign investors have changed the strategy of "locking short and buying long" last year in anticipation of the peak of US Treasury yields, as long-term interest rates have fallen faster than short-end interest rates, and have increased their purchases of short-term US Treasury bills.
From the perspective of investors, both private and official foreign investors also increased their holdings of U.S. bonds, with one increase and one decrease in the previous year. As of the end of 2023, private foreign investors held US$4,268.3 billion in U.S. bonds, accounting for 53.3% of the U.S. debt balance held by foreign investors0%, an increase of 33 percentage points, accounting for a new high since data began in 2013; Holdings for the year increased by $646.1 billion, compared with a decrease of $0.5 billion in the previous year. Among them, the net ** U.S. debt was 604.1 billion US dollars, down 328%；The positive valuation effect was US$42 billion, compared to a negative valuation effect of US$899.4 billion in the previous year. During the same period, the balance of U.S. bonds held by official foreign investors was US$3,787.8 billion, an increase of US$119.9 billion, compared with a decrease of US$449.8 billion in the previous year. Among them, the net ** US debt was 66.8 billion US dollars, and the net sale was 182.2 billion US dollars last year, ending the situation of net ** for nine consecutive years, reflecting that with the slowdown of the Fed's tightening pace, the US dollar siphon effect has weakened, and the pressure on foreign exchange intervention of other central banks has been reduced; The positive valuation effect was US$53.2 billion, compared to a negative valuation effect of US$267.6 billion in the previous year. The positive valuation effect of official foreign capital is better than that of private foreign investment, mainly because official foreign investors account for more than 90% of medium- and long-term US bonds, while private foreign investors account for only about 80%, and the former has benefited more from the decline in long-term US bond yields.
Next, we look at the broad international capital flows in the United States (excluding direct investment), which are broadly consistent with the changes in foreign holdings of U.S. bonds mentioned above. In 2023, the United States recorded a net inflow of international capital of US$864.5 billion, down 46.6 from the previous year6%, but it still ranks fifth in history. From the perspective of investment entities, the net inflow of private foreign capital was 678.5 billion US dollars, a decrease of 57.5 billion4%；The net inflow of official foreign capital was 186 billion US dollars, an increase of 6.%.17 times. From the perspective of investment varieties, the net foreign capital of US bonds was 670.8 billion US dollars, a decrease of 64%；Net U.S. agency debt was $160 billion, down 47.3%；Net U.S. corporate debt was $304.2 billion, up 85.5 billion6%；Net U.S. companies were $89.8 billion, compared to $226.8 billion in net selling in the previous year. It should be pointed out that although the cumulative net ** US debt of foreign capital in the fourth quarter of 2023 was 76.7 billion US dollars, a decrease of 176%, but recorded a net inflow of international capital of US$277.6 billion in the same period, an increase of 114%。This is mainly due to the fact that although foreign investors have reduced their purchases of U.S. bonds and agency bonds, they have increased their investment in corporate bonds and **. Therefore, it is too early to judge that the global dollar shortage has basically eased.
Chinese capital continues to ** U.S. bonds
According to data from the U.S. Department of the Treasury, as of the end of 2023, Chinese investors (hereinafter referred to as "Chinese") held a balance of US$816.3 billion in U.S. bonds, a decrease of US$50.8 billion from the end of last year, a decline of 70% from the previous year for three consecutive years7%。Among them, the net sale of U.S. bonds was 56.3 billion US dollars, an increase of 369 times, which is the net ** for three consecutive years; The positive valuation effect was US$5.6 billion, compared to a negative valuation effect of US$161.2 billion in the previous year.
In terms of investment varieties, as of the end of 2023, the balance of medium- and long-term U.S. bonds held by Chinese investors was US$799.6 billion, accounting for 98% of Chinese U.S. bond holdings0%, accounting for 1 percent lower than the end of last year5 percentage points, 11 percent higher than the global average for the same period4 percentage points; Holdings for the year decreased by $62.7 billion, down 63.3 percent from the previous year9%。Among them, the net sale of medium and long-term U.S. bonds was 68.2 billion US dollars, an increase of 4% over the previous year42 times; The positive valuation effect was US$5.6 billion, compared to a negative valuation effect of US$161.2 billion in the previous year. During the same period, the balance of Chinese holdings of U.S. Treasury bills was US$16.7 billion, an increase of US$11.9 billion from the previous year, much more than the scale of the previous year, which only increased by US$600 million.
In the last two months of 2023, the balance of US bonds held by Chinese investors continued to rise month-on-month, not because of the sharp increase in Chinese holdings of US bonds, but mainly because of the positive valuation effect caused by the sharp decline in US bond yields. During the same period, the balance of U.S. bonds held by Chinese investors increased by US$46.7 billion, of which US$6.1 billion was net sold (US$12.5 billion and US$6.4 billion in November and December, respectively), and the cumulative positive valuation effect was US$52.8 billion (the cumulative negative valuation effect in the first ten months was US$47.2 billion), which contributed 113% of the increase in Chinese U.S. bond holdings during the same period.
In 2021 and 2022, Chinese investors continued to sell U.S. bonds and U.S. companies, but due to the continuous increase in U.S. agency bonds and corporate bonds, Chinese investors still accumulated net assets of US$60.8 billion and US$109.3 billion respectively in medium- and long-term U.S. Treasury bills. In 2023, Chinese investors will once again sell US bonds and companies** 56.3 billion and 19.7 billion US dollars, respectively, and increase their positions in US agency bonds and corporate bonds by 24.3 billion and 600 million US dollars, respectively. However, because the total net ** volume of the latter two is not as good as the net selling amount of the first two, the cumulative net sale of medium and long-term US ** assets in the current period is 51.2 billion US dollars.
From 2018 to 2023, the cumulative net assets of Chinese investors in the medium and long-term United States will be 197.6 billion US dollars, equivalent to 97%, which is 46 less in absolute terms than the cumulative value in 2012 and 20170%, and the proportion is 82 percentage points. This suggests that over the past six years, Chinese investors have generally reinvested less of their surpluses with the U.S. in the U.S.
The relevant statistics of the State Administration of Foreign Exchange also reflect the above-mentioned development trend. According to the latest statistics on China's (private) overseas investment assets (excluding the use of official reserve assets), as of the end of June 2023, the balance of China's investment assets in the United States was US$237.9 billion, an increase of 638%。Among them, the balance of equity ** assets was 122.1 billion US dollars, an increase of 489%, accounting for 51% of China's investment assets in the United States3%, down 5. from the end of 20171 percentage point; The balance of debt** assets was 115.8 billion US dollars, an increase of 83.8 billion0%。Despite the increase in the absolute amount of Chinese investment in the United States**, the United States remains the second largest destination for China's outward investment after Hong Kong, but the importance of the United States tends to decline. During the same period, the U.S. accounted for 22 percent of China's outward investment assets0%, down 7. from the end of 20172 percentage points. Among them, it accounts for 201%, down 69 percentage points; It accounts for 24 percent of China's external debt** investment asset balance4%, down 82 percentage points. According to the latest statistics on the external financial assets and liabilities of China's banking industry, as of the end of September 2023, US dollar assets accounted for 580%, down 10. from the end of 20170 percentage points. During the same period, US dollar assets accounted for 74 percent of the foreign currency financial assets of China's banking sector2%, down 25 percentage points.
In the fourth quarter of last year, China's foreign direct investment (FDI) regained net inflows
In the third quarter of 2023, China's foreign direct investment (FDI) deficit in terms of balance of payments (DFI) for the first time has sparked heated discussions in the market. In this regard, the author has repeatedly written that since the balance of payments of FDI includes the debt transactions of affiliated enterprises and the "two unpaid" profit investments of foreign-invested enterprises (including the undistributed profits of foreign shareholders and the distributed unremitted profits), the statistical data is highly volatile, so it is not appropriate to linearly extrapolate the changes in net FDI from individual quarterly data, let alone equate a negative net FDI with divestment.
According to preliminary balance of payments data from the State Administration of Foreign Exchange, in the fourth quarter of 2023, foreign direct investment (FDI) turned into a surplus of US$17.5 billion from a deficit in the previous quarter, an increase of US$29.3 billion from the previous quarter. Among them, the surplus of equity investment was US$23.4 billion, an increase of US$18.3 billion from the previous quarter, contributing 626%；The debt current deficit of affiliated enterprises was US$5.9 billion, a decrease of US$10.9 billion from the previous quarter, contributing 37.7%.4%, reflecting the positive spillover effect of the easing of Fed tightening expectations in the current quarter, the "double rise" of global stocks and bonds, and the loosening of financial conditions.
For the whole year, the surplus of foreign direct investment was US$33 billion, a decrease of US$147.2 billion or 817%。Among them, the surplus of equity investment was US$62.1 billion, a decrease of US$97.5 billion, contributing 66% of the total decline in the surplus of foreign direct investment3%；The debt deficit of affiliated enterprises was US$29.1 billion, an increase of US$49.6 billion year-on-year, contributing 337%。Obviously, the reversal of the debt exchange of affiliated enterprises cannot be regarded as the withdrawal of foreign capital. As for whether the sharp decline in foreign equity investment is due to the decline in new foreign equity investment, or the withdrawal of foreign capital by existing foreign-invested enterprises, or the decrease in the reinvestment of the allocated unremitted profits due to the decline in the profits of foreign enterprises, it is necessary to analyze the specific situation on a case-by-case basis.
In addition, some people have used the data of the International Investment Position Statement to prove that there is a large-scale divestment of foreign-invested enterprises in China. According to the latest data, as of the end of the third quarter of 2023, China's foreign direct investment stock was US$3,345 billion, of which the stock of foreign equity investment was US$3,039.7 billion and the debt stock of affiliated enterprises was US$305.3 billion, down by US$353.4 billion, US$334.8 billion and US$18.7 billion respectively from the peak at the end of the first quarter of 2022. However, excluding the impact of trading factors, in the second quarter of 2022 and the third quarter of 2023, the above three variables caused by non-trading factors such as exchange rates and asset ** revaluation were written down by 447.8 billion, 449.4 billion and 1.5 billion US dollars, respectively. The write-downs of the first two are more than the total declines of the relevant variables over the same period, suggesting that the decline in FDI and FDI stock is due to negative valuation effects, rather than net outflows of real gold**.
During this period, the central parity of the RMB exchange rate accumulated **116%, resulting in a cumulative write-down of US$381.6 billion in US dollars in the stock of foreign equity investment registered in RMB, which contributed 84.4% of the write-down of the stock of foreign equity investment in the same period9 per cent and 108 per cent of the total decline in the stock of foreign direct investment0%。This further shows that equating a decline in the stock of foreign capital with a withdrawal of capital is "a mistake of a fraction of a second."