Bond Market Belgian Mystery Draws China Focus: Cutting Research

Is China the answer to the mystery of why Belgium is now home to so many U.S. Treasuries?

The euro area’s sixth-largest economy has boosted its holdings by $140.6 billion since the start of December, making it the third-biggest holder of the world’s benchmark debt, with $341.2 billion in February. That’s almost twice what it had a year earlier.

When investors first began wondering about the rise, they initially turned to Russian billionaires, said Simon Derrick, chief currency strategist of Bank of New York Mellon Corp. The theory was that they were switching their investments to accounts elsewhere to protect against sanctions amid the Ukraine crisis. Belgium hosts Euroclear Bank SA, which provides securities settlements for foreign banks.

Taking on the role of data detective, Derrick deduced the Russians probably aren’t the culprits. While Russian holdings of Treasuries did decline in January and February, by $12.4 billion, that most likely reflects a reduction in currency reserves, he said in an April 22 report.

He instead looked to China. Its currency reserves rose $32 billion in December -- and its holdings of Treasuries fell $46.7 billion. Assuming its authorities need to keep a third of their overall reserves in U.S. debt, that leaves it looking for an alternative home for $55 billion in December, according to Derrick’s calculations. That suggests that approximately the same amount of China’s Treasury holdings have been parked in Belgian banks.

“Curiously, this is almost exactly the amount that the holdings in the name of Belgium rose by than month,” said London-based Derrick.

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It’s too soon to write off Japan as an export powerhouse.

With the government announcing this week that its trade deficit widened to the biggest ever for March, at 1.45 trillion yen ($14.2 billion) the country’s reputation as a supplier of the world’s goods is indeed in doubt. The shortfall has gone on for 21 straight months, the longest slide in comparable data back to 1979.

The deficit may nevertheless soon start to narrow again, perhaps sharply, according to Julian Jessop, chief global economist at Capital Economics Ltd. in London, in an April 22 report.

He expects the unexpected events that hurt the trade balance to unwind. The deficit stems in part, Jessop says, from the earthquake and subsequent Fukushima disaster of 2011, an increase in energy prices and a slide in the yen, which boosted the cost of imports more than it aided exports. Anticipation of this month’s consumption tax increase has also hurt.

Still, the government is planning to restart some nuclear plants, global oil prices should drop and a recovery in the rest of the world will lift demand from abroad as the tax increase slows it at home, Jessop said. The yen’s decline is largely over and exporters might be willing to cut prices to regain market share.

“Over the longer term, the structural reforms to labor and product markets promised under ’Abenomics,’ probably corporate tax cuts and lower energy costs should go some way towards reviving the attractiveness of Japan as a production base,” Jessop said.

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The Organization for Economic Cooperation and Development is the latest institution to have a crack at estimating what an emerging-market slowdown would mean for the developed world.

Its simulations suggest for every 2 percentage points of slowdown in developing nations, growth in high-income countries could be about 0.75 point lower on average. Half a point of that pullback would be accounted for by trade.

A risk is that the fallout could be exacerbated by swings in exchange rates and financial markets, the Paris-based group said in an April 17 study.

Among its membership, Belgium, Japan and the Netherlands would be the hardest-hit given their strong trade links with emerging markets, it said.

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The return of global inventories to their historical average is masking differences between developed and emerging economies.

That’s according to a new tracking gauge produced by HSBC Holdings Plc economist James Pomeroy. He estimated that the contribution to economic growth from inventories is negative in 80 percent of cases following aggressive stock-replenishment and so expansion is subsequently lower.

The U.K. and Germany have low inventory levels, suggesting upsides for production, he said in an April 23 report. Strong production in Japan has led to low inventories but the tax increase may hold it back.

By contrast, many developing nations have excess inventories they’ll need to run down, suggesting some weakening of production. China and Russia are in that group, Pomeroy said.

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Okun’s Law lives.

The relationship suggesting a link between economic growth and unemployment appeared to break down during the U.S. recession of 2007 to 2009. Unemployment rose more quickly in those two years than would be expected given the modest drop in gross domestic product reported at the time. Since then joblessness has declined rapidly despite fairly modest growth.

The rule was designed by the late Arthur Okun, a professor at Yale University in New Haven, Connecticut, and onetime chairman of the Council of Economic Advisers.

Now economists at the Federal Reserve Bank of San Francisco say that recent revisions to GDP data suggest unemployment followed a typical cyclical pattern during the slump comparable with past deep recessions and slow recoveries.

“The comparatively common patterns suggest that rumors of the death of Okun’s law during the Great Recession were greatly exaggerated,” said Mary C. Daly, John Fernald, Oscar Jorda and Fernando Nechio in their April 21 report.

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