International Monetary Fund (IMF)

Turkey is in a bit of financial trouble. It isn’t clear that today's rate hike on its own will be enough. The rate hike will make the lira a bit more attractive to foreign investors (and will raise the return on domestic residents holding lira deposits too).  But it will squeeze the banks—who run a funding mismatch in lira. And higher rates on lira won’t change the fact that Turkey, its banks, and its firms, have more dollar and euro debt coming due than they have liquid external reserves. Turkey is also a NATO ally of the United States, and, at least in theory, possibly a future member of the European Union. Though in both cases, Turkey’s actual position is, let’s say, rather complicated.  The United States and Turkey disagree more than they agree, despite being treaty allies. And there is no realistic possibility Turkey will be admitted to the European Union anytime in the foreseeable future. In the past, though, Turkey’s geopolitical significance would have added to the pressure on the United States to support an IMF package to bolster Turkey’s reserves.   And Turkey fits into the IMF’s current policy template for the kind of countries that deserve large scale financial support relatively well (e.g. it fits into the Fund’s exceptional access policy framework*), at least in some ways. It has a solid underlying fiscal position, even if it needs a bit of long-term fiscal adjustment and likely faces a significant bank recapitalization bill. Its government doesn’t have that much debt, and most of Turkey’s treasury debt is denominated in lira rather than dollars and euros. It’s just a bit short of external reserves, and its banks have an awful lot of short-term external debt.    Erdogan, of course, doesn’t want to go to the IMF—so the question of whether the United States would support a Turkish rescue is a bit theoretical for now. The more interesting question for the moment is whether Turkey might find a geo-strategic coalition of the willing that would be able to mobilize sufficient financial support to make a real economic difference without requiring that Turkey go to the IMF. The answer, I think, hinges on how much money Turkey needs—and of course just how much risk a coalition of the “friends of Turkey” might be willing to take. And to make it interesting, in a financial sense, I think you have to leave China and Europe out.   China has—in my view—about a trillion more reserves than it needs. And it has substantial lending capacity outside of its central bank as well: the annual increase in the external lending of China’s state banks recently has been about $100 billion a year. For all intents and purposes, China can mobilize financing if it wants to on a scale comparable to the IMF. But there is no sign for now that China has any interest in doing so. The institutional and political barriers to any European rescue are much higher. The EU doesn’t have a big existing facility that is well-suited for Turkey (see Claeys and Wolff of Bruegel), and it almost certainly would never lend without the IMF’s participation. But if it had the will to create a special Turkish Loan Facility, the underlying financial capacity is there—especially if lending were combined with pressure on European banks to maintain their existing exposure to their Turkish subsidiaries and other Turkish borrowers.  What of Russia and Qatar? Russia has about $450 billion in total reserves—$370 billion in foreign exchange reserves, and around $75 billion in gold. That’s about $75 billion more foreign exchange than the post-sanction, post-oil shock low of around $300 billion. And Russia’s reserves have been growing—they are up over $25 billion in the last year, thanks to funds set aside in Russia’s oil stabilization fund—though this inflow has temporarily been suspended to support the ruble. Finally, Russia runs a sizeable current account surplus too, one that should easily top $75 billion in 2018. For all that, lending Turkey $100 billion (well over 5 percent of Russia’s GDP) would be a financial stretch—foreign exchange reserves would dip below $350 billion if a large part was made available upfront. But in my view, Russia probably could join together with others to cover a $50 billion package while maintaining a decent reserve buffer of its own.   And if Russia wanted to structure a portion of its aid a bit more creatively, it also could help Turkey over time by convincing Gazprom to provide Turkey with gas at below market prices… Qatar is really, really rich. It has a huge amount of gas (and some oil too) relative to its population, and has accumulated one of the world’s largest sovereign wealth funds. It is again running a current account surplus too thanks to higher gas prices, even with some rather large domestic spending commitments. Plus Qatar historically hasn’t been afraid of leverage—its state backed banks could chip in. The only question is whether Qatar has enough spare foreign exchange lying around that it could lend a large chunk to Turkey while remaining in a financial standoff with its neighbors. Qatar has already promised $15 billion to Turkey—though it isn’t clear over what time frame. And in a bad scenario, Turkey needs foreign exchange today, not a promise of loans to fund new buildings and the like over time. The form Qatar’s support takes matters as well as the size.   Between them, though, I suspect Russia and Qatar likely could match the $50 billion the IMF provided Argentina over three years—the comparison works because Argentina is an economy that is (broadly) comparable in size to Turkey. But would that be enough? Well, it depends. Turkey’s current account deficit was running at a roughly $50 billion annual pace before the latest fall in the lira. It has been attracting about $10 billion in FDI, leaving a gap of $40 billion that the market currently isn’t willing to fill in. However, the current account deficit is clearly now falling sharply. Auto sales were down by 50 percent in August. The lira has already fallen significantly, Turkey’s government has promised a bit of fiscal consolidation, Turkey’s banks seem to have more or less stopped lending and Turkey is heading for a potentially sharp recession. Robin Brooks of the IIF thinks Turkey’s underlying current account is now heading toward a surplus—I want to see confirmation, but it seems safe to assume that the Turkey no longer needs to worry about financing a current account deficit. What then is Turkey’s financing need? Well, it depends. Turkey has about $180 billion external debt coming due, according to the latest central bank data. And most of that is denominated in foreign currency. The Central Bank of Turkey’s foreign exchange reserves are now just over $75 billion, and the banks may have about $25 billion (or a bit less now) in foreign exchange of their own. I left out Turkey's gold reserves, in part because they are in large part borrowed from the banks and unlikely to be usable.   Turkey’s banks also have about $160 billion in domestic foreign currency deposits. To be absolutely safe with that funding structure, Turkey would need to hold about $300 billion in reserves, or maybe $250 billion if the rule would be a year’s external rollovers and all domestic sight deposits in foreign currency. It obviously falls far short.   Let’s assume that Turkey’s foreign currency deposits stick around. Historically they have. And well, if they don’t, Turkey is clearly in big trouble. The potential drain from the $180 billion in external debt coming due depends on the rollover rate—if everyone renews their lending and Turkey’s current account goes away, Turkey would be able to survive on its current reserves. And it depends a bit on how carefully Turkey guards its reserves. All Turkey owes non-residents holding a lira denominated government bond is the lira that has been promised—if the foreign investors want dollars instead, they have to go and buy those in the market. Turkey’s government is under no obligation to provide the dollars. Similarly, Turkey’s government is under no obligation to provide dollars to firms that have maturing external debts.   Obviously if non-resident investors with maturing lira bonds are buying dollars and firms are buying dollars, the lira could fall significantly—and that has other consequences. But it’s also worth differentiating a bit between the external debt of the banks (the financial sector has over $100 billion coming due according to the central bank's data, with at least $70 billion and probably more in foreign currency—that counts the short-term debt of the state banks together with all claims on the private financial sector) and the government ($5 billion and other financing need). And it is of course possible to do an even finer grained scenario. The banks’ foreign currency debt is composed of a mix of deposits, syndicated loans from international banks, other loans, and a few bonds. The rollover rate in each category will vary. Let’s assume, for the sake of argument, that one third of all maturing external claims rolls off. That would burn through $60 billion in reserves—that could come directly from the roll off of bank claims, or from a decision now to allow a surge in foreign exchange demand from firms (or holds of lira bonds) to feed through entirely into the exchange rate. Turkey and its banks start with $100 billion in foreign exchange—perhaps enough to survive for the year if firms with external debt are left to fend for themselves. But it is close at best. Remember, the lower reserves go, the more likely a broader run becomes. In a run you want to get out and get paid in foreign exchange even if the underlying bank may be solvent because, well, you know the bank will run out of foreign exchange, and it is better to have a dollar in hand than a dollar at a bank that lacks dollars.   So at some point domestic residents would start to run too. A hypothetical $50 billion loan from Russia and Qatar (with $30 billion or so provided up front — Argentina was a $50 billion IMF program with $15 billion upfront, so this is a bit more generous than the IMF's initial Argentine program) would immediately raise foreign exchange reserves at the central bank to around $100 billion (with another $25 billion in the banks). That still leave reserves below maturing short-term external debt, but it would cover the maturing foreign exchange denominated debt of the government and the banks (around $20 billion of total short-term claims on Turkey are clearly denominated in lira).**  It thus provides enough to perhaps manage in a relatively benign state of the world, but falls short of the overwhelming display of financial force that would more or less guarantee success (provided, of course, that Turkey carries out the needed policies—which is no sure thing).  And, well, it isn’t clear that a Russian and Qatari bailout would be all that reassuring to many of Turkey’s current foreign creditors. After all it would signal that Turkey is determined to go at it on its own, and not tap into the biggest potential sources of funds around. And neither Qatar nor Russia have experience providing conditional financing All that means it also would be enormously risky for both Qatar and Russia, financially speaking—   The $50 billion they might provide wouldn’t go through a multilateral institution, so their bilateral rescue would lack the protections that by custom are afforded to the multilateral lenders.  And if it is tried and fails and Erdogan ends up relenting and going to the IMF, the IMF would at a minimum face pressure not to allow its lending to be used to pay Russia and Qatar back. Normal financial logic suggests it isn’t worth it. The financial risks are too high. Russia might face tighter sanctions. And squandering your reserves on a poorly designed financial rescue while cutting pensions has some obvious domestic political risks.    Turkey—an $850 billion economy before the lira’s depreciation, more like a $600 billion economy now—is large relative to the $1.25 to $1.5 trillion GDP of Russia and the $150 billion GDP of Qatar. But it also isn’t clear that today’s world is ruled by normal financial logic.    To be clear: I seriously doubt Russia would try to lead a rescue package on its own. But I wouldn’t be totally surprised if Putin had at least asked his bankers for an assessment of what Turkey might need, and pondered the question. Turkey is a big geopolitical prize. More importantly, it should be fairly obvious that the basic logic for estimating how much Turkey needs also applies should Turkey turn to a combination of the IMF and Europe for support…   * I personally think the IMF’s exceptional access policy decision puts too much weight on fiscal debt and too little on external debt, but, well, that fight was lost several years ago (it wasn't a fair fight, the Fund had all the high cards). ** Here is a chart looking at Turkey's external foreign currency financing need. The central bank's data shows $20 billion or so of short-term claims (on an orginal maturity basis) are in lira. I didn't infer that any of the additional claims in the residual maturity numbers are in lira, so technically this could be a slight over-estimate.

Germany seems to have ruled out all the mechanisms for eurozone fiscal expansion that the IMF liked…

Probably only connoisseurs of IMF Access Policy debates understand the importance of being judged “sustainable with a high probability” by 19th Street. That’s what unlocks the keys to the kingdom, so to speak. Sustainable, with a high probability, countries can borrow large sums from the IMF without having to worry about locking in their private creditors in some way. What happens when a country that is sustainable, but not with a high probability, needs large sums? Well, it is complicated. I suspect I could litigate the precise meaning of the early 2016 access policy decision with the best of them, and I am not sure. The Fund broadly expects private creditors to maintain their exposure, but that goal can be achieved in a lot of different ways (selling some bonds to the private IMF?), and it may not always be necessary.* I have little doubt that the Fund considers Argentina to be sustainable with a high probability (the last Article IV signaled more concern about the value of the exchange rate than about debt sustainability), and thus eligible for exceptional access. The U.S. certainly does. I don’t disagree—public debt to GDP isn’t that high (yet). But I do think it is a closer call than many. Largely because of a variable that isn’t the focus of the new access policy. Namely, exports, or the lack of them. In 2017, exports were only a little above 10 percent of Argentina’s GDP. As result, Argentina’s external debt—the debt it owes to the rest of the world—is pretty high relative to Argentina’s limited exports. External debt of thirty-five percent of GDP should be a bigger concern in an economy that exports 11-12 percent of its GDP (and relies on the almighty soybean, often processed, and other agricultural products for about a half of its exports) than in an economy like Germany, or Korea. The same point applies to Argentina’s 5 percent of GDP current account deficit. It is large relative to Argentina’s export base. Argentina thus isn’t a simple liquidity crisis—a crisis caused more by too few reserves than by too much overall debt. And Argentina also isn’t (yet) a country that obviously has too much overall debt. But it is a country that is adding to its (external) debt at too rapid a pace.** Argentina thus falls into the category of countries that are “sustainable if they can successfully adjust.” The Fund thinks that Macri’s government can carry off the needed fiscal adjustment, and that financing to allow a smooth path of adjustment will make the needed changes socially and politically sustainable. The Fund also believes—see the Article IV—that a gradual tightening of fiscal policy will allow a looser monetary policy and thus help bring the peso and the current account down over time. Fair enough. Ultimately, this is the kind of judgement call that the IMF has to make. But the path to sustainability strikes looks difficult. Argentina’s external debt isn’t really 35 percent of its GDP. That’s the ratio at an over-valued exchange rate. With a 25 percent depreciation, external debt rises to close to 50 percent of GDP (and Argentina now pays on average about 6 percent on its external bonds, — so interest payments aren't small relative to Argentina’s export base). Exports would also obviously go up versus GDP if the peso depreciates, so the ratio of external debt and debt service to exports wouldn’t change).***  I did a quick estimate of what happens to Argentina’s debt to GDP path if:  it reduces its external borrowing to $20 billion a year (likely by reducing its current account deficit, but it could come through a rise in foreign direct investment); it borrows $30 billion in reserves from the IMF (e.g. an IMF program) and; the peso depreciates by 25 percent (lowering GDP in dollar terms commensurately).   This is a bit of ballpark math—but hopefully it is a reasonable bit of ballpark math.**** Thanks to the need to borrow reserves, external debt to GDP rises to close 60 percent of GDP at the end of 2019, against exports of around 15 percent of post-depreciation GDP and reserves of around 15 percent of GDP. A bad harvest, a large rise in the dollar (as U.S. treasury yields rise to pull in the funds the U.S. needs and prevent the economy from over-heating in the face of unneeded fiscal stimulus), or bad dynamics around the peso and the growing stock of short-term peso debt that Argentina needs to roll all could throw the needed adjustment off track. Argentina needs enough foreign demand for its bills to allow the central bank to lower rates. But not so much that the inflow of funds bids the peso up and prevents adjustment in the current account. Argentina went into its 2001 crisis with an external debt to GDP ratio of 60 percent and a current account deficit of around 3 percent. So Argentina is on a trajectory that will potentially get it close to quite problematic debt levels.  The main difference is that back in 2001 Argentina’s currency board—and its highly dollarized banking system (see the case study on Argentina here)—made depreciation impossible without a crisis. The fact that the peso now floats gives Argentina a chance to put its external debt on a more sustainable long-term trajectory without creating a domestic banking crisis or throwing the economy into deep recession. But I do think that the Fund needs to look a bit beyond public debt when it thinks about an economy like Argentina. The combination of a low level of domestic savings and a low level of exports have long been Argentina’s Achilles heel. */ The exceptional access policy decision for cases in the grey zone: ”It would be appropriate for the Fund to grant exceptional access so long as the member also receives financing from other sources during the program on a scale and terms such that the policies implemented with program support and associated financing, although they may not restore projected debt sustainability with a high probability, improve debt sustainability and sufficiently enhance the safeguards for Fund resources … Directors noted that, in applying this more flexible standard in circumstances where debt is assessed to be sustainable but not with high probability, there would be a range of options that could meet the prescribed requirements. There would be no presumption that any particular option would apply. Rather, the choice would depend on the circumstances of the particular case … If the member has lost market access and private claims falling due during the program would constitute a significant drain on available resources, a reprofiling of existing claims would typically be appropriate …. In this context, the scope of debt to be reprofiled would be determined on a case-by-case basis, recognizing that it would not be advisable to reprofile a particular category of debt if the costs for the member of doing so—including risks to domestic financial stability—outweighed the potential benefits.” Not clear? Good. There should be a bit of flexibility. The staff paper behind the exceptional access policy decision can be found here [PDF]. **/ Though between the growing stock of central bank paper—Lebacs—and short-term domestic law dollar borrowing—Letes—Argentina also does have too much short-term debt. ***/ Compared to the Fund, I obviously put more weight on external debt relative to exports than public debt to GDP. To make this difference concrete, think of the difference between Japan—a high domestic public debt country that is a net creditor to the world, and Argentina. Japan is a net creditor to the world and its government’s solvency improves with a yen depreciation (as Japan’s government has lots of foreign currency-denominated assets, and its debts are all in yen). Argentina is a net borrower from the world, and primarily in foreign currency, so its solvency deteriorates when the peso depreciates. Countries like Russia and Brazil are more resilient because their governments are net long in foreign currency, as their central banks have more reserves than the government (and the big state firms) have foreign currency debt. ****/ I didn't model peso and foreign currency debt separately, so I implicitly assumed that foreign investors would make up any losses from the peso's depreciation through high interest rates. As most of the peso debt seems short-term, that is likely to be close to true. I also would recommend the external debt sustainability analysis in the IMF's latest staff report (buried a bit in Annex I, which starts on p. 41); the real depreciation shock modeled on p. 48 scares me, but in the model it comes after several more years of current account deficits).  

China seems to be aiming to cut its (central government) fiscal deficit to around 2.6 percent of GDP. That’s the new target—down from a three percent target last year (UBS think the actual deficit in 2017 was around 3.5 percent of GDP). And the China is cutting taxes too, putting additional pressure on central government expenditure. The proposed cut in the central government's fiscal deficit is a mistake: China saves too much. National savings are still close to 45 percent of GDP. The central government has the strongest balance sheet in China. Central government debt is well under 20 percent of GDP (table 5). The natural debt dynamics for central government borrowing is quite favorable, as nominal/real growth is much higher than nominal/real rates. Consequently, the central government can easily support a larger fiscal deficit. And so as long as the central government borrows at a lower rate than China’s local governments do, shifting borrowing toward the center actually improves China’s debt sustainability (see the debt sustainability analysis in the appendix to the IMF's China 2017 Article IV). Expanding the scope of social insurance is the key to bringing China’s high levels of savings down. And it would be much easier to expand social insurance if the central government, not the provinces, took responsibility for the provision of basic pensions and unemployment insurance. That’s what the IMF, among others, has found. A bigger on-budget fiscal deficit would actually make it easier to slow the growth of credit. Less credit—meaning less credit to Chinese firms (often state-owned or state-backed firms to be sure)—risks slowing growth. Historically, such growth slowdowns have led the government to ease off. But it seems that direct fiscal spending provides a more powerful impetus to growth than the expansion of credit. China could, in effect, get more with less if it relied less on bank credit and inefficient investment and more on central government borrowing and social spending to support its economy. That's why China should be raising central government borrowing even as local governments cut back. The augmented fiscal deficit is something like 12 percent of China's GDP—any needed reduction in the overall fiscal impulse could easily have come from squeezing off balance sheet borrowing by local governments. This all matters for the world too. So long as China saves so much, keeping demand growth up is a problem—and in the past, the solution to that problem has either been exporting China’s spare savings to the world and drawing on global demand, (through large trade surpluses) or putting those savings to work in China through credit easing. My view here hasn’t changed from 2016: “Before the financial crisis, excess East Asian savings stoked the U.S. housing bubble and helped to create internal imbalances in the United States and the eurozone, which were sustained only through the accumulation of toxic risks in the U.S. and European banking systems. Since the crisis, they have contributed to bubbles and bad debts within the region, notably in China.” While a larger United States fiscal deficit adds to the world's balance of payments imbalances, a larger fiscal deficit in China helps to limit them—without its fiscal deficit, China’s external surplus would likely be much bigger. The 2016 fiscal stimulus (done largely off-budget), in my view, is a big reason why China's current account surplus is now well under 3 percent of its GDP.* But set aside external imbalances for a moment. I worry more about them than some others. China’s fiscal tightening also works against China’s core domestic policy goals. China wants to reign in domestic credit and limit financial excesses. It also wants to scale back off-balance sheet borrowing by local government investment vehicles/locally owned state firms (China and the IMF haven’t been able to agree if lending to such firms constitutes a hidden fiscal deficit or just another loan to China’s indebted state backed firms, but that’s mostly a question of accounting). Fair enough—there unquestionably have been significant excesses. Yet such policies also restrain domestic demand growth, slamming on the brakes without having offsetting policies in place to help support demand would lead the economy to stall. China can limit the risks posed by its desire to scale back off-budget credit to local firms through a larger on-budget fiscal deficit. That would keep up demand—and reduce risk that restraints on financial sector leverage will be reversed should the economy slow more than expected. Not all parts of the economy need to “delever” (relative to GDP that is, not absolutely) simultaneously. Moreover, constraining the central government’s fiscal deficit—particularly at a time when the government is cutting taxes—inevitably will require squeezing public spending. That will make it hard to provide the kind of expansion of the social safety net—higher minimum pensions, more spending on public health, more transfers to low wage workers—that China needs to bring down its high household savings.** Over time China has scope to finance a larger safety net out of higher income tax collections, or even through transferring ownership of state firms over to the pension system. But building up income tax collections will take time—a bit of borrowing could help provide a bridge. China in my view made a mistake after the global crisis by relying so heavily on off-budget stimulus (credit, local government investment vehicles, etc.). It should have done more on budget, from the center. The Ministry of Finance's de facto 3 percent of GDP cap on the central government’s fiscal deficit in effect just pushed borrowing on to the balance sheet of entities less able to handle it. It risks continuing that mistake now. */ China's true current account surplus is between half a point and a full point of GDP higher than officially reported, as its tourism deficit is clearly overstated. See Anna Wong. **/ The IMF’s selected issues paper (basically, staff research) on China was particularly good this year. The underlying research is providing the basis for a series of stand-alone papers as well (links to the relevant papers are above). Many of thees papers strongly make the case that China would benefit from rebalancing government support for the economy away from credit and public investment toward stronger provision of social services, and that China would benefit from a much more progressive system of taxation. The IMF is still a bit too inclined to advocate fiscal consolidation in some current account surplus countries for my taste—and a bit too timid in its call for fiscal expansion in Korea. But it now is a strong voice for expanding social spending in several East Asian surplus economies.

Often one of the best ways to get noticed is to highlight something a bit surprising. A data point that doesn’t match expectations for example. Puerto Rico’s large trade surplus for example, which, really is “fake” news: it is rather obviously a function of transfer pricing that helps pharmaceutical firms shift profits offshore, where they can be indefinitely tax-deferred. But it also is important to remember that many things play out more or less as expected. Here are three that have caught my eye: 1. Capital flows to emerging market commodity exporters have been pro-cyclical. Not exactly news, but important. Most emerging economies are commodity exporters, and most pay more to borrow when commodity prices are low. That makes it harder to smooth commodity price volatility by borrowing from abroad—and makes it more important for commodity exporters to have a buffer stock of assets (or a flexible currency). (A hat tip to Peterson’s Chad Bown for highlighting this VoxEU paper by Thomas Drechsel and Silvana Tenreyro). Now perhaps this is changing. The IMF’s global financial stability report is worried that the global reach for yield may have gone a bit too far.* And I have certainly been struck by the large sums many Gulf countries have borrowed recently. But these countries may be the exception that prove the rules. The Emiratis, the Qataris, and the Saudis all have substantial assets stockpiled either in their central banks’ foreign exchange reserves or in their sovereign funds. They are in a sense borrowing to avoid selling their assets—rather than borrowing “naked” to finance the deficits created by the fall in oil prices.** 2. Tight fiscal policy often contributes to large current account surpluses. The latest IMF revisions to Korea’s fiscal stance offer a case in point (the Korean article IV has been delayed it seems, but the WEO provides updated numbers). It turns out that Korea’s 2016 fiscal policy was tighter than that of Germany. Germany’s structural surplus was 1 percent of GDP, while Korea’s was 2 percent of GDP. The IMF also now believes there was significant structural tightening in 2016 as well (something I am not sure either the IMF or the Treasury noticed in real time; the Koreans have done a lot of “fake” stimulus). The IMF has taken note of the government of Korea’s substantial assets--Korea’s net debt is about 5 percent of GDP. I suspect the IMF added the social security funds’ assets to its calculations of net debt. Korea’s 2016 fiscal tightening was thus globally unhelpful. It drained the world of demand when the world was short of demand. That put pressure on countries with weaker public balance sheets to do more to support demand. And it of course also contributed to the weaknesses in Korea’s economy that led the Bank of Korea to ease—and at times to intervene directly in the foreign exchange market to cap won strength. The IMF’s fiscally driven current account model doesn’t always work well (China’s credit boom and large fiscal deficit for example sits oddly with its balance of payments surplus). But for Korea, it captures a large part of the story—especially because the social security fund’s accumulation of foreign assets provides a direct link between Korea’s structural surplus (a function of high contributions to the social security fund) and capital outflows. 3. China’s export machine is still strong, and it still responds to changes in the real exchange rate The IMF estimates that world import demand (and world exports) will grow by about 4 percent this year (for goods). China’s export volumes are, according to the (not ideal) Chinese data up about 8 percent.*** So Chinese export growth once again will exceed global export growth (Chinese import growth is more or less in line with China’s growth, or a bit faster than China’s growth, which is good news—and a bit of a change). That’s why I am generally skeptical about stories that suggest China is losing its competitive edge in manufacturing: it may be true in some narrow sectors, but it simply isn’t borne out in the global data. And, well, a pick-up in Chinese export growth after a close to 10 percent real depreciation is more or less what a standard trade model would forecast. The yuan’s 2016 fall certainly seems to be having an impact on China’s 2017 export performance. Basically, when the yuan rose strongly in 2014, Chinese export growth slowed to match global export growth (a change for China). And the 2016 depreciation seems to have helped push Chinese export growth above global export growth—which is more or less the “norm” for China. And that recovery in exports, along with tighter controls and a broader rebound in economic activity all have helped to stabilize China’s currency’s for the time being.   * The Fed’s balance sheet expansion since 2010, has, according to the IMF’s global financial stability report, explained a sizeable share of portfolio flows to emerging economies—about a half of the roughly $350-400 billion total in the data set, with fed policy expectations also contributing significantly to inflows (p. 21, and figure 1.15: model estimates indicate that about $260 billion in portfolio inflows since 2010 can be attributed to the push of unconventional policies by the Federal Reserve). I applaud the effort to quantify portfolio balance effects. But I also thought there was something a bit strange about the results of the IMF’s attempt to quantify the impact of balance sheet expansion on emerging market flows. The study focused entirely on the Fed, but—as Figure 1.13 on p. 19 shows—the Fed’s quantitative easing hasn’t been nearly as significant, relative to government bond issuance and thus to the available supply of bonds, as ECB and BoJ balance sheet expansion. Maybe there is a massive asymmetry here: ECB QE is bad for emerging markets flows because it induces inflows into the U.S., raises the value of the dollar and thus indirectly hurts emerging markets because they tend to borrow more in dollars than in euros or some such? But it isn’t obvious to me why the effect of ECB and BoJ QE should fundamentally differ from the effect of U.S. QE. At the end of the day, Europe and Japan are net savers and thus the ultimate supplier of funds—and QE in Europe and Japan has worked in part by reducing domestic yields and thus encouraging investors to reach for yield abroad (see Coure’s speech in July). ** Technically, their debts reduce their net asset position, rather than add to a net debt position. *** China reports the y/y growth in its exports monthly, but doesn’t report an estimated level. I took the average of the available y/y changes. The y/y numbers can be volatile because of shifts in the timing of the lunar new year, but the monthly volatility tends to offset (a big fall in February means a big rise in March or vice versa).

Giving macroeconomic policy advice to a country that saves 46 percent of its GDP is hard. Imprudent domestic policies help limit large external (trade) imbalances, and more prudent domestic policies could result in a return to large external imbalances.   Policy changes to reduce national savings are critical.