I am at a conference and haven’t had time to delve into the results of the stress tests — or to really delve into Friday’s news flow. Normal blogging likely will resume on Monday.

In the interim though, I thought it would be interesting to do some quick calculations to see how much interest income China has been receiving on its US bond portfolio. The US BEA provides a fairly detailed breakdown of the United States’ income balance with China. As one would expect, the US is paying far more interest now than it did in 2000 — or for that matter 2004.

The US data likely underestimates payments made to China in 2008 — largely because interest payments are calculated — I suspect — based on the information in the survey data (if the US knows the coupon on the bond and the holder, it can estimate payments) and the 2008 data hasn’t revised to reflect the last survey. Moreover, the US data — even after the survey revisions — likely understates China’s holdings on US corporate bonds.

Nonetheless, it is possible to compare the interest the US is paying to China to a very rough estimate of China’s US holdings — and thus to calculate the implied interest rate China is receiving on its investment in the US. The average interest rate the US is paying has clearly turned down:

The estimate of China’s US assets I used for the calculation is very very rough — I assumed 70% of China’s total (non FDI) foreign assets are in dollars, and compared the rolling four quarter sum of interest payments to China’s estimated average holdings of dollars over the past four quarters. If I had taken the time to convert my monthly data on China’s estimated US holdings into a quarterly data series, I could have produced a better estimate — one that no doubt would show that China is receiving a slightly higher average interest rate on its US holdings. (the calculation above slightly overstates China’s holdings of US bonds, and thus understates the average interest rate on those bonds)

Directionally, though, there is no doubt that the average cash return on China’s bond portfolio is falling, as one would expect. And it no doubt has further to fall, especially now that it has shortened the maturity of its Treasury portfolio by buying so many Treasury bills.

While the market value of China’s long-term bonds soared during the crisis — that doesn’t provide much comfort to an institution that doesn’t mark to market. Conversely, China’s cash compensation for taking dollar risk is falling.

That though was a risk China’s government opted to take when it opted to maintain an undervalued exchange rate and thus to accumulate dollar assets. There was always a risk that the renminbi value of China’s dollar bonds would fall. And by say 2003 it wasn’t exactly a secret that the Fed tends to respond to a US slowdown — and a fall in US inflation — by cutting US policy rates.

It can now be found at www.blogs.cfr.org/setser. My first post is on -- what else -- the details of the TIC data. I clearly went for a crowd pleasing mega-hit.

If all goes according to plan, the transition should be pretty seamless. The blog archives have been transferred, and at some stage RGE will automatically redirect old links over the cfr site. My blog may even still appear on the RGE site in some form. I want to thank the RGE tech team in particular for going beyond the call of duty and helping to facilitate the transfer of content over the CFR site. Of course, not every transition works quite as well as planned, and I suspect that a few glitches will emerge. But hopefully everything will be running smoothly relatively quickly.

Update: I have a couple of new post on www.blogs.cfr.org/setser.  One looks at the impact of $125 oil on the size of the big Gulf sovereign funds; another asks if China's current reserve growth (and ongoing export growth) is sustainable.    I would be interested in reactions (either here on the cfr.org/setser blog) to both arguments.

This is not a post about the gas tax. Nor is it a post about how the United States existing energy-inefficient capital stock makes it harder for the US to adjust to higher oil prices. Dr. Krugman has already covered that ground well. It is rather a post about how the global balance of payments has to respond to what increasingly looks like a significant oil shock.

Sovereign funds argue that they are only interested in financial returns.

And to be sure, they do care about financial returns. Losing money generally isn’t good for a sovereign fund's long-term health. But many are also expected to at least try to invest in ways that contribute to the economic development of their home country. This is often quite explicitly part of the fund’s mandate. Qatar’s investment fund indicates that its investment criteria include “economic synergies or benefits for Qatar and its people."

Gerald Lyons of Standard Chartered has recognized that sovereign investments are sometimes motivated by concerns that go a bit beyond risk-adjusted return. Stephen Foley reported a while back:

Gerard Lyons, chief economist at Standard Chartered bank and a leading expert on SWFs, said in a recent panel discussion in Washington that funds' behavior is likely to be a mixture of commercial consideration and "state capitalism", where investments are likely to reinforce particular government goals, such as spurring the development of natural resources in Africa – already a key area of Chinese government investment.

Finding investments with positive spillovers and synergies is often hard -- see Reuter's Alan Wheatley for an excellent discussion of the constraints sovereign funds face. The most obvious way to promote domestic economic development would be to invest at home rather than to invest abroad. But if a fund exists to manage surplus foreign exchange accumulated to resist pressure for appreciation, it has to invest abroad.

Or at least appear to invest abroad. An investment abroad that triggers a reciprocal domestic investment doesn’t produce a net outflow.

Examples of investments that seemed geared toward promoting the home country’s own economic development are not hard to find.

Mubadala's investment in Ferrari likely contributed to Ferrari’s decision to build a theme part in Abu Dhabi.

Dubai’s interest in the NASDAQ stemmed from its desire to cement its position as a regional financial center.

Dubai now seems to intend to use its sovereign fund – DIC – to raise the profile of the Dubai International Financial Center. DIFC has had trouble attracting listings. No problem. Firms that the DIC invests in will be encouraged to list on the DIFC. Roula Kalaf in the FT, last week:

DIC is putting $500m into the $1bn fund, set up with Hong Kong-based First Eastern Investment Group, and designed to invest in small and medium-sized companies with the hope of bringing some of them public on the Dubai International Financial Exchange.

While expressing his disappointment with the performance of the DIFX to date – it still has few companies trading and one expected initial public offering was pulled last week – Mr Ansari insisted that the exchange was headed for “revolutionary change” once its tie-up with Nasdaq is implemented.

The new Saudi fund -- which thinks of itself as an investment fund rather than wealth fund -- also seems to have a mandate that is focused as much on domestic economic development rather than increasing the returns on the Saudis investment abroad. The Saudi finance minister, quoted in Reuters:

"The focus at the beginning may be on the technology sectors, especially in the fields that could attract technology to the kingdom in alliance with global companies," Ibrahim al-Assaf told Al Arabiya television. The focus would be on investments inside the world's largest oil exporter, where opportunities abound, Assaf said, adding foreign investment was not ruled out.

Countries have long required that companies wanting to do business with their government show their bona fides by buying locally made parts. Airline orders are an example. Seeking to use the state's buying power to spur economic development isn't new.

However, the scale of the funds now at the disposal of many emerging market governments is something that is new. The Gulf’s city-states efforts to use their foreign investments to bolster their efforts to transform themselves into regional financial centers hardly seem to threaten US or European interests – or jobs. Europe, though, has been far more worried by the purchases of a stake in EADS by a Russia’s state bank. And it does seem -- based on the Wall Street Journal's reporting -- that Russia's government hoped that VTB's stake in EADS would prompt EADS to do more to support Russia's aerospace industry. MORE FOLLOWS

If all goes according to plan, my blog will be migrating to cfr.org later this week. The transition should be pretty seamless -- at least that is the goal.

It obviously is a bit of a change for me, after being a part of the RGE site for so long. I am particularly grateful that Nouriel and RGE hosted my blog for the past several months, even after I moved to the Council on Foreign Relations. It also will be a bit of a change for the Council and for the Center for Geoeconomic Studies. I trust that the high quality of comments that has distinguished this blog will continue - and that the comments will remain focused on global economic issues. I'll have more later in the week.

Peter Goodman looks at the dollar – and the growing dollar reserves of emerging market central banks -- in today’s New York Times.

He captures the poles of the debate well. Ken Rogoff argues that it doesn’t make sense for poor countries to provide the US with a form of foreign aid by holding more low-yielding US assets that they need: “central banks know that holding these low-yielding Treasury bills is just an aid program to the United States.” Some analysts – a group that clearly includes me as well as Jim Fallows -- question whether it makes sense for China to be financing, indirectly, real estate speculation in the US rather than schools in Shanghai.

“Investing money in the United States requires spending that much less on enormous problems at home, like pollution and a shortage of health care. By indirectly making mortgages cheap in the United States, China has helped foster the boom that saturated Miami with glittering condos even as tens of millions of Chinese live in dilapidated concrete block apartments.

Mike Dooley, on the other hand, argues that emerging market financing of the US is the best development program the world has yet devised. Emerging markets get a market for their exports; the US – uniquely – can run up big external debts without taking on a lot of currency risk because of the dollar’s global role.

There is a comparable debate over whether enormous central bank financing of the US is a “good” or a “bad” thing for the US. The growth of central bank dollar reserves has unquestionably provided the US with cheap credit. And many Americans are worried about the diminution of the dollar’s global status – in part because the shrinking international purchasing power of the dollar is a powerful symbol of America’s own shrinking global standing. It is hard to argue that it is “Morning again” in America when a dollar only buys 65 euro cents and, for that matter, when one dollar buys less than 1/100^th of a barrel of oil.

On the other hand, there is – I suspect – concern about the extent the US has come to rely on other governments rather than private markets for financing. A country that relies on other governments for financing – and to recapitalize its banks – potentially puts own policy autonomy at risk. And the US has traditionally valued its policy autonomy.

The US would like to maintain the dollar’s global status – and not run up ever larger debts to the People’s Bank of China and the Saudi Monetary Agency. Right now, though, the dollar’s global status hinges in no small part on their willingness to hold dollars. Seriously. It really is hard to overstate how much the dollar's current status as a reserve currency hinges on decisions made by the King of Saudi Arabia and China's Communist party. That Saudis are on track to add $200 billion to their reserves, and most will be dollars. The Chinese are on track to add $600 billion to their reserves (and perhaps more), and a large share will be in dollars. Those two governments alone could finance the US current account deficit if – and it is a big if – all existing holders of US assets were willing to hold onto their claims.

There is an important subsidiary point to make here. Chinese financing of the US has been going up even as the United States' importance to China’s own development has been fading. The Saudis and other oil-exporting economies are financing a growing market for their goods, but China isn’t. Its financing of the US right now just keeps the US market for Chinese goods from shrinking. China is – in effect – financing the US as a byproduct of a policy of holding the RMB down against the euro to support Chinese exports to Europe.

Goodman gave – in my view –a bit too much weight to the argument that the US has been a “remarkably solid place to put money, making it singularly able to attract savings.” That may be true over long periods of time. But it hasn’t been true over the past six years. The dollar is down something like 60% against the euro. US equities have underperformed global equities. And the high-tech wonders of American securitization technology – CDOs based on subprime debt – have recently made investors long for the comparative stability of Argentine bonds.

One of the reasons why the US now relies so heavily on central banks for financing right now is precisely that US financial assets haven’t been a good store of value. Goodman mentioned the slight fall in the dollar’s share of global reserves over the past few years, though he appropriately downplayed its importance. But he didn’t highlight what to me is the most important story of the past few years – the enormous rise in central banks dollar holdings.

The key change since 2000 isn’t the end of the dollar’s status as a reserve currency. It is the growing reliance of the US on central banks to provide a large share of the financing needed to sustain large ongoing trade and current account deficits. Private demand for US financial assets – relative to US demand for foreign assets -- has fallen far faster than the US deficit. My estimates imply that central bank dollar reserve growth in 2007 exceeded the US current account deficit.

My estimates require making some Herculean assumptions about the currency composition of the reserves of China and the Gulf countries -- the key countries that (I suspect) don’t report data to the IMF. They account for a growing share of global reserve growth – and thus a growing share of my estimate for dollar reserve growth. I assume that they hold a higher share of their reserves in dollars than the countries that do report, and that they have not diversified aggressively away from the dollar.

I could be off by up to $100 billion though and it wouldn’t really change the over all story. Central banks added way more dollars to their reserves than at any time in the past.

The following chart shows the dollar share of the countries that report detailed data to the IMF – along with the dollar share of global reserves that underlies my estimates.

Note that a slight fall in the dollar's share of global reserves is consistent with a strong rise in central banks holdings of dollars; overall global reserve growth has been exceptionally strong.

I don’t think my assumptions are unreasonable. Nonetheless, I am planning to try to upgrade my estimates over the next few weeks, largely by separating out the assumptions for China and the Gulf central banks. If anyone has a few tips about the right assumptions to use, I am all ears. And if a few central banks decided to release a bit more data to facilitate understanding of their impact on the global flow capital, I would be very happy – even if their data proved that my estimates are a bit off.

Unless your family is in the wheat or beans business (wheat and soybeans exports have more than doubled when q1 08 is compared to q1 07; total food and feed exports are up 50% y/y), there actually wasn’t a lot to like in this month’s trade release.

Yes, the headline deficit fell relative to February, but February looks to have been a blip. The rolling 3m deficit has been stable at around $59.5b since December. And much of the fall in the deficit came from a big fall in the volume of imported petroleum. Petrol imports (in volume terms) were running ahead of last year’s pace in January and February. March brought the year to date total down below last year’s total, as the volume of imported crude was about 15% lower than the volume of imported crude last March. The fall in volume was large enough to offset a rise in price. The price of imported crude jumped from $84.76 to $89.85, but the seasonally adjusted US petrol import bill still fell by $2.2b, from $37.4b to $35.2b.

The real problem though was on the export side. Export growth looks to be slowing. The headline nominal growth numbers look good. Y/y non-petrol goods exports are up by a healthy 14.8% -- far more than the 3.3% growth in nominal non-petroleum imports. But if the rise in agricultural exports and exports of industrial supplies (petrol, chemicals, metals) is stripped out, export growth was only up 5.2% 8.8% in nominal terms (oops; my bad).

Slower growth among those exports whose price hasn't obviously increased is a warning sign.

A plot of real goods exports and imports shows a small monthly fall in exports in March.*

The data bounces around a lot, but it certainly seems that the pace of growth in real US goods exports is slowing. March real goods exports fell back below their level last June (see Exhibit 10). The usually reliable FT missed this part of the story, opting to highlight ongoing growth in nominal exports ("second-highest monthly" total in history despite the down tick from February) rather than the not-so-strong real growth.

Dollar depreciation helps, but a slowing world economy hurts. Countries that are spending more on oil may have a bit less to spend on other goods. Plus, in some sectors the US may be hitting capacity constraints. Boeing is a case in point: it needs to get its 787 assembly line sorted out …

The improvement in the nominal trade balance – plotted on a rolling 12m basis* – also has stalled.

It isn’t hard to see why: oil

And there is more bad news in the pipeline. Project out $89 a barrel oil for the remainder of the year and the oil balance deteriorates by over $100 billion in 2008. Project out $110 a barrel oil and the oil balance deteriorates by over $200 billion in 2008. The average price of imported oil in q1 of 07 was only $52 a barrel; the average price for all of 2007 was only $64.27 a barrel. That calculation, by the way, assumes that the volume of petrol the US imports continues to fall slowly.

One other point:

The improvement in the US trade balance with China (the deficit was $2.2 billion smaller in q1 2008 than in q1 2007) comes far more from the fact that US imports from China have essentially stopped growing (up $1.3b) than from a rise in exports (up $3.5b). Nominal imports from China in q1 were up only 1.8%; and nominal imports from Asia were up only 1.6%. Imports from Asia actually are growing at a slower nominal clip than imports from Canada or Europe. I am not sure if that reflects “J-curve effects” (flat volumes and rising prices lead to higher nominal imports are an exchange rate move) or petroleum and gas imports. The US obviously imports energy from Canada, and I think it also now imports some refined gasoline from Europe. Energy experts please correct me if I am wrong!

*Thanks to Arpana Pandey of the CFR for help with the graphs

UPDATE: There is nothing like a bit of attention from the big blogs to inspire a bit of additional work. Y/y real goods exports are up 9.5% -- while y/y real goods imports (non-petrol) are down 0.8%. And the y/y growth in real goods exports is fairly broad-based. Ag export volumes are up 13.4% and real exports of industrial supplies are up 13.1%, but volumes for everything else are up 8.2% as well. The trouble is with the quarterly pattern of growth, which suggests some deceleration in export growth.

q1 08 real goods exports are 0.8% higher than q4 07 real goods exports (an annualized growth rate of 3.3%) and q4 07 real goods exporters were 0.6% higher than q3 real goods exports. the q3 over q2 growth rate -- 5.6% -- and the q2 over q1 growth rate -- 2.1% -- were much higher. Basically the strong y/y growth reflects strong growth in the middle of 07 rather than strong ongoing export growth.

Non-petrol real goods imports were down 1.9% in q1 08 (v q4 07) -- which can be compared to a 1.7% quarterly fall in q4 07, 2.3% quarterly rise in q3 and 5% quarterly rise in q2.

Finally, i should note that I initially miscalculated y/y nominal growth  in non-ag, non-industrial supply exports.   The right y/y growth rate is 8.8%, not 5.2%.  My apologies.

The US housing bubble. Bursting.

The “the triple bubbles in property prices, mortgage debt, and the shadow banking system.” Burst.

Soros' thirty year super-bubble in leverage and financial assets. Bursting. Perhaps.

The bubble in Chinese stocks. No longer bursting. Who knows, China's policy makers might even do enough to cause a bit of froth -- if not a bubble -- to reemerge.

Oil. Still going up. Maybe way up. And perhaps not a bubble. Perhaps the bubble that burst was the assumption that the supply of conventional (i.e. low-cost) oil was as elastic as it seemed to be in the 1990s. We still don’t know.

Emerging market government financing of the US and Europe? Still very bubblicious. Look at this chart, drawn from data presented in the statistical appendix of the IMF’s WEO.

The IMF data includes emerging market sovereign fund, the Saudis non-reserve foreign assets (which are counted as reserves) and valuation gains. It excludes China’s state banks and Asian NIE (Korea, Singapore, Hong Kong and Taiwan) reserve growth. Rather than do a ton of adjustments, I’ll just note that I believe that the increase in emerging market government assets that the IMF doesn’t pick up is about equal to the valuation gains that they include, so the overall picture isn't that far off. The IMF data only covers the emerging world, so it also leaves out Japanese reserve growth and the increase in Norway’s sovereign fund. Together they amount to about $100 billion.

What is driving the strong growth? A dual surplus – a surplus in the current account and large net private capital inflows.

The following chart is also drawn from the IMF WEO data.

This isn't just a product of high oil prices. In 1980, oil was quite high but emerging market official asset growth was about 0.5% of global GDP. It is now more like 2.5% of global GDP.

The main reason for the difference between the current era of high oil prices and 1980?

Asia, which imports oil, added to its official assets at an even faster pace than the oil exporting economies in 2007. That may not change in 2008, though the oil exporters are sure to give Asian oil importers a run for the title.

China’s foreign asset growth seems to have picked up to an absurd $200b a quarter pace. We still don't really know, as China hasn't indicated exactly how much foreign exchange was handed over to the CIC in the first quarter. And who knows what will happen in q2. China's trade surplus usually builds over the course of the year, but rising oil may start to bite. But for all the uncertainty, China’s official asset growth will still be strong.

And if oil prices average $110b a barrel this quarter – and if the per barrel price needed to cover the oil-exporters import bill is about $50 a barrel – the external surplus of the oil exporters in the second quarter should be above $200b. If oil stays at its current level for the summer, that surplus will only get bigger. And most of that surplus goes to the state in one way or another. Some countries use their central bank. Russia’s reserves were up by over $25b in April alone, Saudi non-reserve foreign assets increased by around $40b in the first quarter; others use a sovereign fund.

Barring a major change, the Gulf and China could easily combine to add close to a trillion dollars to their official assets this year.

Nothing goes up forever. At some point, the pace of increase in official asset growth has to slow. But as of now, there isn’t much sign of a real slowdown.

Felix claimed not so long ago that the US was too big to fail. Certainly many emerging markets are doing their best to finance the US through its current troubles, and thus keep up demand for their oil and goods. But a part of me wonders if the rise in inflation in the Gulf and China and the difficulties both are facing trying to sterilize the rapid growth in the foreign assets is an indicator that there is a small risk that the US also might end up being a bit too large for the emerging world to save.

The blogosphere's eyes and ears in the London foreign exchange market -- Macro man -- thinks so. China has, he thinks, been a net seller of euros over the past few weeks.   That is something of a change.  It has been a large net buyer for some time -- whether to hit its portfolio targets or in an effort to push the dollar share of its reserves down a bit. If China's foreign assets are rising at an annual rate of between $600 billion and $700 billion -- as Wang Tao, who just moved to UBS, believes -- just maintaining China's existing portfolio targets might require selling something like $200b of dollars for euros a year. That amounts something like $1 billion of sales a business day, minus whatever euros come directly into the central bank from its intervention in the euro/ renminbi market. My calculations assume the central bank intervenes entirely the dollar/ renminbi market.

I find Macro man's anecdotal evidence plausible because something clearly changed about a month ago.

Once the RMB reached 7, its appreciation against the dollar stopped cold.   Over the last month the RMB dollar looks a lot like a tightly managed peg.

That clearly reflects a policy decision inside China.   And it possible that China made a two-fold decision, first to slow (or stop) the appreciation against the dollar and second to do what it could to push the dollar up against the euro.    Stopping dollar sales is a rather obvious way to support the dollar if you are a big net seller.

The idea behind such a strategy would to be to get real appreciation through dollar appreciation rather than through renminbi appreciation against the dollar.   Or to get Europe off China's back once China decided to slow its own appreciation against the dollar.  Or perhaps just to try to profit from a view that the euro has risen to the point where it is likely to fall.

I of course don't whether China has actually scaled back its euro purchases. I would be curious what other think.  And I certainly don't know if the decision to scale back euro purchases was tied to the decision to slow the RMB's appreciation against the dollar -- that is pure speculation on my part.

p.s. A fall in Chinese purchases of euros/ rise in Chinese dollar holdings also might help explain the phenomenal recent increase in the Fed's custodial accounts.

Oil is trading above $120.

Saudi Arabia exports more oil than anyone else.     It isn’t unrealistic to think the Saudis oil export revenue could approach $400 billion a year if oil stays above $120.

Saudi economic development has lagged the Gulf boom towns of Doha, Dubai and Abu Dhabi.  Paul Murphy, quoting Goldman’s Ahmet Akarli:

the Saudi economy has lagged badly behind its peers in the Gulf region in terms of both per capita income and overall living standards – in particular, it lags the rapidly diversifying and prosperous economies of the UAE, Kuwait and Qatar.

The right policy course: a bit of austerity.  Yep, spending cuts.   Or least slower spending increases.

That at least is what the Saudi central bank governor suggests.    The FT reports:

Saudi Arabia’s central bank governor on Tuesday called on the government to fight inflation by curbing public expenditure, warning that economic policies in the kingdom faced “a critical situation” ….

“The Saudi Arabian Monetary Agency [the central bank] has taken steps to reduce domestic liquidity by raising the statutory reserve requirement several times. Given the dominance of fiscal policies on the economy, it is necessary to reprioritise spending and programme it to fit the absorptive capacity of the national economy,” Mr Sayari added.

The IMF – which has been arguing for maintaining the dollar peg and limiting inflation with spending cuts – presumably approves.   The IMF’s advice to Oman is presumably not that different from its advice to the Saudis.    Not that the IMF’s views matter.   The US, which is rumored to have put pressure on the Saudis to maintain their peg to the dollar, presumably does too.

Basically, SAMA and the IMF want the Saudis and the Gulf to spend more on global financial assets – as the fiscal contraction only will fight inflation if the oil revenue is sequestered abroad – and less at home.

All just to maintain a peg to a currency that isn’t a good fit for an oil-exporting region.

A currency that rises and falls with oil makes a lot more sense for an oil exporting economy than a currency that falls when oil rises and rises when oil falls.

Right now, the Saudis are trying to cut spending in the face of a (positive) oil shock in order to squeeze the Saudi economy into a depreciated currency.

They should be allowing a stronger currency to create more economic space to enjoy the oil boom.  Or at least room to spread the benefits of the oil boom a bit more widely.

A stronger riyal – assuming the rise in riyal was real not cosmetic -- would make more domestic spending and investment consistent with lower levels of inflation.

In the 1990s, the Saudis had to cut back because they weren’t getting enough revenue from the oil.   The rising dollar added to strong deflationary pressures.   Real rates rose.  Now, the Saudis face pressure to cut back even as oil soars at least in part because they have pegged their currency to the depreciating dollar.

I rather suspect the current policy won’t work.   The Saudis cannot cut spending enough to really bring about a real depreciation of the riyal.   Not with rising public expectations and tons of petrocash.

Goldman’s Akarli expects Saudi inflation to soon reach 15%.   I suspect he is right.   And there is a real risk that the resulting period of negative real interest rates will only add to the Gulf’s history of following big booms with big busts.