The Economist - USA (2022-06-11)

74 Finance&economics TheEconomistJune11th 2022

though,thingsgetexaggerated.Investors,

including speculative punters, now ac­

countforoneinfivehousepurchases,ac­

cordingtothecentralbank.

Thegovernmentwantstocoolthefer­

vour.Ithasannounceda two­yearbanon

property purchases by foreigners. More

important,developersarerampingup.Un­

itsunderconstructionareata recordhigh.

Tony Stillo of Oxford Economics, a re­

searchfirm,reckonsCanadawilladd2.35m

newhomesthisdecade,outstrippingan

expected1.9mnewhouseholds.

InCarletonPlace,thefastest­growing

towninCanada,halfanhouroutsideOtta­

wa,boththeinsatiabledemand andthe

heftysupplyresponseareondisplay.Ina

newneighbourhoodbeingbuiltbyOlym­

pia Homes,buyers movein as soon as

homesareready.MarkFillier,aresident

sinceNovember,saysheisstillwaitingfor

contractorstoaddthefinishingtouches.

“Theyjustgetthehousesupandmoveon

tothenextone,”hesays.Attheendofhis

streetbuildersareworkingondozensof

newhomes.

Thekeyquestionishowtheproperty

sector morebroadly—from buildersand

buyerstolendersandregulators—willad­

justtoa weakermarket.OxfordEconomics

predictsthatCanadianhousepricesmay

fallbyabouta quarteroverthenexttwo

years.Thatwouldprobablycountasanor­

derlycorrection,leavingpricesabovetheir

pre­pandemic level. Developers would

continuetobreakgroundonnewhomes.

Andthe financialsystemwouldremain

solid.Canadahaslongusedrulestoinsu­

latebanksfromthepropertysector:buyers

seeking a mortgage must, for instance,

havedepositsofatleast 20%onhomes

thatcostmorethanC$1m($795,000).

Atthesametime,though,Canadahas

vulnerabilities.Householddebtisworry­

inglyhigh:about185%ofdisposable in­

come.Giventhatbackdrop,fallinghouse

pricescoulddeala bigblowtoconsumer

confidenceandweighonspendingmore

generally.Canadamaynotbeonthinice.

Butit isskatingintohazardousterritory.n

Whoa,Canada!

G7countries,realhouseprices

2000 average=100

Source:FederalReserveBankofDallas

350

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150

100

50

2000 05 10 15 21

France

UnitedStates

Japan

Italy

Britain

Germany

Canada

Interest-raterises

Treasury seekers

W

hentheFederalReserveraisesin­

terest rates, the effects are felt far and

wide. Capital shifts in and out of the huge

stock of global dollar­denominated assets.

The  Fed  is  expected  to  act  forcefully  over

the  next  year,  raising  rates  to  around  3%,

the highest level since early 2008. But this

time  the  response  of  the  biggest  foreign

holders of dollar assets, particularly those

in Asia, could hold surprises. A burgeoning

group  of  large  private  institutions  is

changing,  and  potentially  complicating,

the picture.

Ten  years  ago  “official”  foreign  inves­

tors—mainly central banks managing their

currency reserves—held $3.4trn in Ameri­

can Treasuries, about three­quarters of all

Treasuries held abroad. Anyone wanting to

understand  the  huge  flows  in  and  out  of

dollar bondstherefore kept an eagle eye on

the big reserve managers. 

There hasbeen plenty of movement of

late.  China’s  reserves—the  largest  single

foreign  stash  of  Treasuries—fell  by  $68bn

in  April,  2%  of  the  total  and  the  largest

monthly  drop  in  more  than  five  years.  Ja­

pan’s  reserves  declined  by  $31bn,  the  big­

gest­ever  monthly  fall.  India’s  reserves

shrank by $26bn in March, the most since

the market panic of October 2008. Those in

South Korea and Taiwan have fallen, too. 

Reserve  managers  are  a  tight­lipped

bunch,  and  rarely  explain  precisely  why

their  holdings  have  changed.  But  some  of

the recent declines are likely to reflect sim­

ple  valuation  effects.  The  dollar  has

strengthened; as a result, holdings denom­

inated in other currencies, such as the eu­

ro,  are  worth  fewer  dollars.  Some  reserve

managers have also intervened in the mar­

ket  by  selling  their  holdings  in  order  to

limit currency depreciation. 

Yet this presents an increasingly partial

picture of capital flows. Asian private insti­

tutions  that  cater  to  ageing  populations,

such  as  pension  funds  and  insurers,  have

exploded in recent years. The assets of Tai­

wan’s life insurers alone, for instance, have

more  than  doubled  in  less  than  a  decade.

Rather like central banks, these tend to buy

and  hold  safe  government  bonds  and  liq­

uid corporate debt.

As a consequence, the share of Treasur­

ies  owned  by  official  investors  has  fallen,

to  58%  of  all  Treasuries  held  abroad.  Priv­

ate foreign holdings make up the rest, and

have risen from $1.1trn to $2.8trn over the

past  decade.  Sales  and  purchases  of  Trea­

suries by private investors can swamp

thosemadebyofficialinvestors,asrecent

trendshavemadeclear.Officialinvestors

sold$36bninTreasuriestoAmericanpunt­

ersinthefirstthreemonthsofthisyear.

Thatlooksmeaslycomparedwiththepur­

chasesmadebyforeignprivateinvestors.

Theysnappedup$235bninTreasuries,the

biggesthaulinanyquarteronrecord.

Thisdivergencemakessense.Reserve

managers get out of Treasuries when

Americaninterestratesclimb,toprotect

their currencies froma stronger dollar.

Privateinvestors,enticedbyjuicieryields

onlong­datedbonds,divein.Evenquasi­

publicinstitutionslikeJapan’sandSouth

Korea’smammothstate­pensionschemes

havegoalsandrisktolerancesthatdiffer

fromreservemanagers.Nonetheless,be­

causemostofthenewlyimportantinstitu­

tionsgrewrapidlyduringa periodoflow

inflationandrock­bottominterestrates,

predictingtheiractionsascircumstances

changewillnotbeeasy.

Things are murkiestof allin China,

wheretheaims offinancial institutions

and the government’s foreign­exchange

managerscandovetail.In 2020 and2021,

forinstance,China’sofficialreserveswere

curiously stable, raising analysts’ eye­

brows.WhilemostotherAsiancountries

withlargetradesurpluseswerereporting

surgingreserves,China’srosebylessthan

5%.ThatraisedthepossibilitythatChina

wasusingits banksto interveneinthe

market:AlexEtraofExanteData,a research

firm,andBradSetseroftheCouncilonFor­

eignRelations,a think­tank,havepointed

tothesurgingvalueofChineselenders’net

foreignassetsasevidenceofhiddeninter­

vention.Sofarthisyear,though,thereis

littleindicationthat Chinahasusedits

statebankstodisguiseintervention.

Interpretingtheshiftsincapitalflows

washardlyeasywhenit involveddecipher­

ingtheactionsofrelatively taciturnre­

servemanagers.Thenew,morecrowded

fieldofinvestorswithvariousholdings,

strategiesandobjectiveswillgiveanalysts

anevenbiggerheadache.n

S INGAPORE

Mighty Asian financial institutions are

reshaping global capital flows

Depleted defences

Foreign-exchange reserves

Change compared with three months ago, $bn

Source:HaverAnalytics

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2020 21 22

Japan China

Taiwan India South Korea