A Few Puzzling Charts
A quick look at some banking and balance of payments numbers that look a bit odd.
I recently had a good conversation with Michael Kiniry of the public radio affiliate of Southwest Florida about the economic impact of the pandemic and inflation. I also had a chance to have a wide-ranging chat with Logan Freeman of FTW Investments. And I wrote a column in the Financial Times based on my recent research on the Chinese economy and the implications for the rest of the world.
This will be a relatively quick note, because I don’t yet have a deep understanding of what actually explains the pictures I am about to show you. However, I think they are worth watching for anyone keeping an eye on the balance of payments and banking statistics for China and for the U.S.
First, look at Chinese banks’ repo borrowing and lending in foreign currency. Before the pandemic, Chinese banks borrowed small amounts of foreign currency via repo1 and did essentially no fx repo lending. In other words, their net position was to be modest borrowers, likely offset by fx-denominated loans to borrowers either in China or outside China.
Things changed radically in 2020 and 2021, with a surge in fx-denominated repo lending that wasn’t matched by a commensurate increase in repo borrowing. Chinese banks were (apparently) financing short-term low-yielding positions in foreign currency using either higher-cost long-term funds or domestic yuan-denominated deposits. That was consistent with other Chinese banking data showing a surge in foreign assets relative to foreign liabilities. But it was odd—and was pointed out at the time as being odd—because interest rate differentials at the time meant that this was almost guaranteed to be a money-losing proposition.
Over the past few months, however, the mismatch has almost entirely disappeared. As of July, the net fx repo position has dropped to just $14 billion, down from $75 billion as recently as February.