Divergent global liquidity

Global liquidity is a difficult concept to precisely define, with this post from a while back showing a couple of different measures from a BIS working paper.  The BIS are now releasing data and a report every 6 months on some of these measures, which can be found here.

We know that the price of money is still at historical lows, with the level of interest rates low and spreads narrow for the most part. This has managed to keep global credit growth rising at a steady pace, albeit slower that global nominal GDP growth.

But while overall growth is slower than the pre-crisis trend, there is a big divergence between different aspects of global liquidity.

For example, cross-border credit growth, as reported by BIS reporting countries (which excludes China) has continued to mostly shrink since the financial crisis.

Domestic credit growth trends are also very different, with huge geographic variation.  Credit growth in the US and EU combined has been travelling @ 1%YoY growth for almost 2 years.  The rest of the world, however, has been growing at faster rates than pre-crisis levels.

While some financial deepening might be welcomed in emerging markets, these credit trends don't appear sustainable.  At some point, credit growth in the rest of the world will have to slow, by either the hands of policy makers, a bursting of a bubble or some combination of the two.  Credit growth in the US and EU is unlikely to pick up the slack given the overhang in the level of debt.

It is also interesting that growth global foreign exchange reserves has started to accelerate again. There was a slowdown when US treasuries spiked in 2Q13, but reserve growth in China in particular has picked up pace.

This is not due to stronger trade, which if anything has been underwhelming in China and elsewhere. So these data seem suggest cross border flows are starting to pick up again.

This may be a sign that money is starting to move, but doesn't necessarily mean its moving to the right place.  To be sure, the recent depreciation in the Chinese Yuan appears aimed at curbing these flows.