SINGAPORE: Asian foreign exchange reserves rose more than US$220bil in the first quarter 2004, according to central bank figures, and the rise could have been larger since China has not updated its figures.
Asian central banks held US$2.13 trillion of foreign exchange reserves at the end of March, up from US$1.91 trillion at end-2003 and US$1.44 trillion at the end of 2002.
The reserve accumulation largely reflects the region's determination to stem gains in currencies against the US dollar and protect export competitiveness.
JP Morgan estimates that Asia now holds almost 70% of the world's foreign exchange reserves.
But signs of domestic economic strength, emerging inflationary pressures and the rising costs of intervention all point to a slower pace of growth in reserves.
When a central bank intervenes to buy dollars, it pays for them with borrowed local currency. Since the interest on Asian borrowing is currently more than the interest that central banks can get on their US dollars, intervention can be costly.
“Political headwinds are still an issue, specifically in Taiwan and (South) Korea, but a combination of building domestic economic strength and embarrassingly large foreign inflows are chipping away at their resolve to keep their currencies cheap,” David Fernandez, JP Morgan's head of Asian sovereign debt research, said during an investor conference call this week.
“The big picture from a macro point of view is that we finally see Asia weaning itself from its addiction to cheap currencies,” he said.
Japan's reserve accumulation has been startling. In the 12 months to the end of March, Japan's reserves have risen by two-thirds. In the first three months 2004, they have risen by more than US$150bil.
Asian reserve holdings have risen by more than US$620bil, or 41%, in the 12 months to end-March, although the figures are incomplete.
China, the world's second largest holder of reserves, has not released details of its holdings for February or March. While Japan has accounted for most of the regional increase over the last 12 months, it is not alone in its rapid build-up.
India and Malaysia's reserves grew by more than 45% in the 12 months ended March. Taiwan and South Korea's reserves rose by about one-third, and Singapore's holdings rose almost a quarter.
In December, China used US$45bil of reserves to bail out two banks. Last month, the official Financial News paper said China's reserves would probably rise by about US$100bil in 2004, and there could be further use of them to inject capital into the troubled banking system. – Reuters