econintersect.com
       
  

FREE NEWSLETTER: Econintersect sends a nightly newsletter highlighting news events of the day, and providing a summary of new articles posted on the website. Econintersect will not sell or pass your email address to others per our privacy policy. You can cancel this subscription at any time by selecting the unsubscribing link in the footer of each email.



posted on 11 May 2016

The Turnaround In Private And Public Financial Outflows From China

from Liberty Street Economics

-- this post authored by Thomas Klitgaard and Harry Wheeler

China lends to the rest of the world because it saves much more than it needs to fund its high level of physical investment spending. For years, the public sector accounted for this lending through the Chinese central bank's purchase of foreign assets, but this changed in 2015. The country still had substantial net financial outflows, but unlike in previous years, more private money was pouring out of China than was flowing in.

This shift in private sector behavior forced the central bank to sell foreign assets so that the sum of net private and public outflows would equal the saving surplus at prevailing exchange rates. Explanations for this turnaround by private investors include lower returns on domestic investment spending and a less optimistic outlook for China's currency.

Inferring Data Using National Income Identities

China's income exceeds its spending, which is equivalent to saying its saving exceeds its physical investment spending, that is, all money spent replacing or adding to the capital stock. As an accounting matter, a country's income is allocated to either consumption or saving while spending goes to either consumption or investment spending. These two identities mean that a nation's saving equals its investment spending when income equals spending. Opening up to trade allows a country to have its income exceed its spending when its exports exceed its imports, and this difference exactly equals the difference between saving and investment spending. The insight here is that the gaps between spending and income, between saving and investment spending, and between exports and imports all equal a nation's lending to (or borrowing from) the rest of the world.

These identities are useful in backing out data that are hard to calculate directly. For instance, most countries, including China, do not calculate their gross saving (personal, business, and government). The International Monetary Fund (IMF) circumvents this data limitation by calculating saving indirectly as the sum of investment spending and the current account balance. Essentially, it rearranges the identity presented in the previous paragraph: the trade balance (measured by the current account) equals the gap between saving and investment spending - that is, CA = S - I.

Measuring cross-border financial flows is also difficult. The financial account in the balance of payments is supposed to do this, but those numbers often differ substantially from the current account when they should be of the exact same magnitude, ignoring the trivial capital account. It is easier to measure imports and exports than financial flows, which makes the current account balance a better measure of net financial flows. The relative reliability of the two balances was important last year when China reported net financial outflows from both public (the central bank) and private investors at $143 billion, while the current account implied that net financial outflows totaled $331 billion. So, we do not know the whole story about gross financial flows into and out of China in 2015, but we do have a good sense of the net value of these flows from the current account balance.

China's High Saving and Investment Spending

The chart below, which plots gross saving and investment spending as a share of GDP, shows that China's saving rate is so high that the country can finance a very high level of investment spending and still have a substantial saving surplus that must flow abroad. Note that the saving surplus narrowed during the global downturn (2008-09) as the government pushed investment spending to unusually high levels of around 47 percent of GDP, relative to the average of 38 percent over the previous twenty years, to make up for weak export growth.

Gross Saving and Investment Spending

The high investment spending illustrates the current challenges facing China. Such spending will, at some point, yield diminishing returns. In fact, IMF data suggest that investment spending as a share of GDP fell in 2014 and 2015, consistent with declining returns on this spending. The country's macroeconomic challenge is that additional reductions in investment spending as a share of GDP will be a drag on the economy, requiring higher consumption and/or exports to maintain growth.

Moving China's Saving Surplus Abroad

The chart below shows that China's saving in excess of investment spending, in dollar terms, rose to $331 billion in 2015 after averaging around $250 billion per year over the past decade. In the past, these financial outflows were in the form of purchases of foreign assets by China's central bank, because private investors were more interested in investing in China. Explanations for private investors' interest in domestic assets include high rates of return in China, capital controls that make it difficult to move funds out of the country, and expectations that the currency would tend to appreciate over time given the country's rapid growth. Indeed, it was often the case that more private money was flowing into than out of China as foreign investors bought Chinese assets. As a result, the central bank had to channel out the domestic saving surplus and recycle back private inflows.

Net Lending to Rest of World

The chart below shows the dramatic change in the composition of financial outflows last year. It uses data on China's current account balance and its central bank foreign exchange reserves to back out the net flows of private money, since public plus private net financial flows equal the current account balance. This calculation shows that private investor outflows to purchase foreign assets (or reduce foreign liabilities) were $673 billion more than private investor inflows to purchase Chinese assets at prevailing exchange rates. China's central bank ended up selling $342 billion in foreign assets so that the sum of net private and public financial flows would match the country's $331 billion surplus saving.

Net Financial Outflows: Public versus Private

Possible explanations for this shift in investment preferences include signs of a lower rate of return on domestic investment spending and a decrease in confidence that China's currency would only strengthen over time.

For the rest of the world, China is still a major buyer of global assets. What changed last year is the risk appetite of those investing abroad, with private investors replacing the central bank as the buyer of these assets.

Disclaimer

The views expressed in this post are those of the authors and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System. Any errors or omissions are the responsibility of the authors.

Source

http://libertystreeteconomics.newyorkfed.org/2016/05/the-turnaround-in-private-and-public-financial-outflows-from-china.html#.VzBwXPkrKUk


About the Authors

Klitgaard_thomas

Thomas Klitgaard is a vice president in the Federal Reserve Bank of New York's Research and Statistics Group.

Wheeler_harry

Harry Wheeler is a senior research analyst in the Group.

>>>>> Scroll down to view and make comments <<<<<<

Click here for Historical News Post Listing










Make a Comment

Econintersect wants your comments, data and opinion on the articles posted.  As the internet is a "war zone" of trolls, hackers and spammers - Econintersect must balance its defences against ease of commenting.  We have joined with Livefyre to manage our comment streams.

To comment, using Livefyre just click the "Sign In" button at the top-left corner of the comment box below. You can create a commenting account using your favorite social network such as Twitter, Facebook, Google+, LinkedIn or Open ID - or open a Livefyre account using your email address.



You can also comment using Facebook directly using he comment block below.





Econintersect Contributors


search_box

Print this page or create a PDF file of this page
Print Friendly and PDF


The growing use of ad blocking software is creating a shortfall in covering our fixed expenses. Please consider a donation to Econintersect to allow continuing output of quality and balanced financial and economic news and analysis.


Take a look at what is going on inside of Econintersect.com
Main Home
Analysis Blog
Joan Robinson’s Critique of Marginal Utility Theory
The Truth About Trade Agreements - and Why We Need Them
News Blog
Five Mysterious Space Diseases That Could Kill Astronauts Before They Get To Mars
03 December 2016 Initial Unemployment Claims Rolling Average Insignificantly Worsens
November 2016 CBO Monthly Budget Review: Down by 3 Percent in the First Two Months of Fiscal Year 2017
Putting Grassroots Terrorism In The Proper Perspective
Crude Oil Prices: "Random"? Hardly. The More Emotional The Market, The More Predictable It Is.
Infographic Of The Day: Job-Hopping
Early Headlines: Asia Stocks Up, Oil Firms, Russia's Big Oil Deal, Trump Will Stay In Business, Trump Menaces Drug Cos, Banks Rig Silver, Italy's 360B NPL, Iraq Has Oil Cut Problem, China Trade Improves And More
Goals Come With A Hefty Price Tag At The Emirates
Facebook Strongest On Home Ground
Defence Budgets Are Surging In The Baltic States
It's Been A Turbulent Start, But Juno Is Now Delivering Spectacular Insights Into Jupiter
The World's Most Reputable Cities
What We Read Today 07 December 2016
Investing Blog
Trumpsternomics And Economic Growth
The Real 401k Plan Manager 07 May 2016
Opinion Blog
Italy Confronts The European Elite
The US Government Needs To Spend More
Precious Metals Blog
Silver Prices Rebounded Today: Where They Are Headed
Live Markets
08Dec2016 Market Update: Wall Street Marches On, New Intraday Highs Mark Bull Run Advancement, US Dollar Back Up, Crude Prices Steady
Amazon Books & More






.... and keep up with economic news using our dynamic economic newspapers with the largest international coverage on the internet
Asia / Pacific
Europe
Middle East / Africa
Americas
USA Government



Crowdfunding ....






























 navigate econintersect.com

Blogs

Analysis Blog
News Blog
Investing Blog
Opinion Blog
Precious Metals Blog
Markets Blog
Video of the Day
Weather

Newspapers

Asia / Pacific
Europe
Middle East / Africa
Americas
USA Government
     

RSS Feeds / Social Media

Combined Econintersect Feed
Google+
Facebook
Twitter
Digg

Free Newsletter

Marketplace - Books & More

Economic Forecast

Content Contribution

Contact

About

  Top Economics Site

Investing.com Contributor TalkMarkets Contributor Finance Blogs Free PageRank Checker Active Search Results Google+

This Web Page by Steven Hansen ---- Copyright 2010 - 2016 Econintersect LLC - all rights reserved