China’s reserves are still growing, the CFR’s Benn Steil argues

In an email to subscribers, Council on Foreign Relations economist Benn Steil argues that after currency adjustment, China’s reserves continue grow:

Bloomberg and other media outlets have been highlighting the apparent significant recent fall in China’s foreign exchange reserves, suggesting that the development had important implications. In a recent blog post, former Fed Chair Ben Bernanke argued that a “global excess of desired saving over desired investment, emanating in large part from China and other Asian emerging economies and oil producers like Saudi Arabia, was a major reason for low global interest rates.” If this is so, then Chinese reserve sales can be expected to push up global rates.  But is China actually selling reserves? The actual currency composition of China’s reserves is unknown – so no hard measurement of sales can be made.  However, if we assume that the composition is approximately the same as that of other EMs – about 65% dollars, 20% euros, and 15% others – we can estimate it. As shown in the graphic above, once we strip out currency fluctuation effects – that is, the steep recent rise in the dollar – Chinese FX reserves actually increased mildly, rather than decreased, between last June and December.  Thus Bloomberg’s assertion that China had “cut its stockpile” of reserves appears erroneous. So to the extent that Bernanke’s global savings glut thesis is accurate, China continues to exert downward pressure on global interest rates.