Asian Foreign Exchange Reserves: A $2.46 Trillion Question

From Reuters
Friday, March 11, 2005

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SINGAPORE -- One of the hottest topics in world markets is whether Asian central banks will diversify their huge currency reserves, a move that could hit the dollar hard.

The head of India's central bank, which has the sixth biggest reserve stockpile in the world, on Friday said the central bank was discussing the issue of reserve diversification.

This came a day after Japan stoked speculation it could sell dollars when its prime minister spoke of diversification as being necessary.
Last month South Korea made similar remarks.

Following are some of the positions from Asian financial authorities and key facts about Asian reserves.

Asian reserve totals:

-- Asia has more than $2.46 trillion in foreign reserves.

-- That has risen 23 percent in a little over a year after reserves
first topped $2 trillion in February 2004.

-- Japan and China have nearly $1.5 trillion between them.

-- Taiwan, South Korea, India, Hong Kong, and Singapore have reserves ranging from nearly $115 billion to nearly $250 billion.

....Why they've grown....

Asian central banks have intervened heavily in the past year and a half to restrain their currencies, fearing that currency strength could choke off the exports that power their growth.

Some track the dollar informally to ensure competitiveness. Others, notably China, have a fixed peg that obliges them to accumulate dollars when their balance of payments is in surplus.

....Has diversification taken place?....

-- Asian central banks do not give currency breakdowns of reserves.

-- U.S. data suggest Asian countries have diversified to some extent. Their combined holdings of U.S. Treasury securities rose more slowly in 2004 than the rise in total reserves.

-- Latest IMF data gives central bank breakdowns through 2003 and shows little change from 2002.

-- The share of dollars held by all central banks was 63.8 percent versus 63.5 percent in 2002. For developing countries it was 59.3 percent versus 59.8 percent.

-- The dollar's share has declined a few percentage points from 2000 but is broadly higher from a decade earlier.

-- The Bank for International Settlements said this month Asian banks have cut the proportion of dollar bank deposits in those countries that report currency breakdowns to the BIS.

-- Dollar deposits were 67 percent of the total in Q3 2004 versus 81 percent three years earlier. Some of these deposits may be central bank cash, though the BIS does not have data on this.

"I believe diversification is necessary," Japanese Prime Minister Junichiro Koizumi said Thursday when asked in a parliamentary committee about the risks of having reserves too concentrated in one
currency.

A Ministry of Finance official told Reuters: "We have no plan to change the composition of currency holdings in the foreign reserves and we are not thinking about switching dollar reserves to euro holdings."

The State Administration of Foreign Exchange, China's foreign exchange regulator, in December denied that China was cutting U.S. dollar assets held in its foreign exchange reserves, saying it would
not make changes based on short-term market moves.

"As foreign exchange reserves increase, (the Bank of Korea) will expand its investment into non-government papers, which carry relatively high yields, and diversify the currencies in which it
invests," a spokesman for the Korean central bank was quoted as saying last month in a report to parliament.

The Bank of Korea later said this did not mean the central bank would sell dollars, and other central banks also weighed in. Taiwan's central bank said it had not been selling dollars.

"Yes it is being discussed," Reserve Bank of India governor Yaga Venugopal Reddy told reporters on Friday, after being asked whether
the central bank was talking about diversification. "We are always discussing. It's a continuous process."

Reddy added: "It is an ongoing debate with all central banks and you cannot expect a central bank governor to say anything further on this."

"We have been reducing our investments in dollar bonds but investing more in euro and Asian bonds. And we will keep doing so," Olarn Chaiprawat, adviser to Thailand Finance Minister Somkid Jatusripitak, told Reuters in January.

Thailand now had half its foreign reserves in U.S. dollar bonds, with the rest in European and Asian bonds, he said.

Previously, about 80 percent of the foreign reserves were kept in dollar-denominated bonds and the rest in European and Asian bonds,
Olarn added.