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Re: some interesting globalization links - for your by kjkhoo 18 March 2002 17:47 UTC |
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To which one might add the links to the Global Economic Forum of Morgan-Stanley (or is it Morgan Chase?), from which, a recent item, one in a long series -- http://www.morganstanley.com/GEFdata/digests/20020306-wed.html Global: A New Source of External Financing for the US Joe Quinlan/Rebecca McCaughrin (New York) Notwithstanding a collapse in the US tech sector, an economic slowdown, a terrorist attack and a corporate accounting debacle, the appetite of foreign investors for US assets was never stronger last year. Net portfolio inflows totaled a record $531 billion in 2001- a 16% jump from the prior year. In the fourth quarter alone, net US inflows surged by nearly 65% from the corresponding period of 2000, to $175 billion. The sharp uptick in the final quarter was due to a number of factors, including America's safe haven status, increasing signs of a recovery in the US economy, and the relative attractiveness of US assets against a backdrop of back-sliding on reform in Japan and weakness in Euroland. Following the events of September 11th, foreign investors dumped nearly $12 billion of US equities, the largest monthly sell-off since the Russian debt crisis and collapse of the Long-Term Capital Management group, dragging down total inflows to just $5 billion in September. In October, however, net foreign purchases soared to nearly $70 billion on strong demand for US government and corporate bonds. In November, net inflows were $58 billion, down from October's record high, but still well above the average ($44 billion) seen over the first eight months of the year. Similarly, net inflows of $ 47 billion in December were down from the prior month, but above the monthly average seen for the year. Net purchases by asset class were evenly spread for the month, with foreign purchases of US equities showing a significant recovery relative to prior months in 2001. The US dollar's year-to-date strength-up 2% on a trade-weighted basis-suggests that US portfolio inflows have been sustained at a relatively healthy level in early 2002. That's likely to remain the case in a world where the US leads and everyone else follows. It's a familiar script and one that favors US assets. Still, while we remain impressed with the resiliency of US portfolio inflows thus far, we nevertheless harbor concerns related to the shift towards less traditional sources of capital. It is common knowledge that China is a low-cost provider of consumer goods to the US, with US imports from the mainland running the gamut of consumer staples. Less well known is that the mainland is not only a key supplier of goods to the US but also a growing source of capital. Increasingly, China is recycling its US trade surplus back into US dollar-denominated assets, offsetting weaker inflows from Europe and Japan. Over the last two months of 2001, Asia ex-Japan, led by China, emerged as a key source of external funding for the US, offsetting weaker inflows from more traditional sources-Japan and Europe. Last year, net portfolio inflows from Europe fell 8%. After soaring to a record $295 billion in 2000, and accounting for roughly two-thirds of US inflows, US net inflows from Europe declined to just 51% of total US inflows. US net inflows from Japan rose 15% in 2001, although over half of last year's total inflows occurred in October, when Japanese inflows soared to a record $33 billion. In November and December, net inflows from Japan totaled just $3.3 billion and $3.6 billion, respectively. Net US inflows from Asia ex-Japan totaled $17.3 billion in November and another $19.8 billion in December, the strongest two-month surge on record. In December alone, the region accounted for 42% of total US inflows, with China and Hong Kong the primary sources of capital. The late-year surge in inflows from Asia ex-Japan pushed the regional total to a record $111 billion for the year, more than double the level of the prior year. As a result, Asia ex-Japan's share of US inflows rose to 21% last year, up from 11% in 2000. Chinese investors, we believe, have been attracted to US assets on account of the underlying strength of the US economy and increased investor nervousness in China as the nation implements provisions under WTO. In addition, growing concerns over Japan's prospects have likely provoked investors in the rest of Asia to reallocate funds from Japan to the US. China has proven to be a reliable, low-cost provider of consumer staples to US consumers. But just how reliable a source of external funding can the mainland be to the US, given China's own massive capital needs? As the world's largest debtor nation, the US has long borrowed capital from the wealthy populations of Europe and Japan. Investors in these regions have been all too willing to plow a sizeable proportion of their excess savings into the US. China, in contrast, is an emerging economic power that needs capital to fuel its own future development. Like the US, it is a large capital importer. China's underdeveloped infrastructure requires massive amounts of capital. If present consumption trends continue, more of China's savings will be spent at home rather than invested overseas. Indeed, any shift towards more consumption-driven growth in Asia ex-Japan implies less savings and capital to be invested in the US. In the near term, improving economic fundamentals in the region and the continued recovery of regional equity markets could have the same effect. Against this backdrop, a key question pivots on the sustainability of large capital inflows from China and Asia ex-Japan as an offset to declining flows from Europe and Japan.
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