Markets
Currency Reserves Swell in Asia
Central-Bank Policy Makers Fight Tide of Cheap Global Capital
By Wayne Arnold And Ken Brown
July 8, 2014 12:15 p.m. ET
According to the latest data, holdings in Hong Kong, Singapore, South Korea and Taiwan all hit new highs, while Japan's reserves rose to $1.28 trillion. Citigroup Inc. economists estimate that China will report a record $3.99 trillion in reserves within the next week.
The surge in reserves comes as U.S. Treasury Secretary Jacob Lew visits Beijing this week, promising to take China to task for buying up dollars to keep its currency artificially low. Mr. Lew said last week he would press China on the yuan, arguing that China's rising level of foreign-currency reserves demonstrate that its value is too low.
Asia's big exporters have long bought up dollars to keep their currencies low and stay competitive. In recent years, though, the region's central banks have increasingly used foreign-exchange reserves as a buffer against vast flows of investment money created by central banks' easy-money policies. Quantitative easing by the U.S., Japan and Europe—efforts to pump money into their economies via large-scale purchases of assets such as bonds—has been particularly significant.
"Asia isn't happy to buy foreign-exchange reserves," said Frederic Neumann, co-head of Asian economic research at HSBC Holdings PLC in Hong Kong. "They're forced into this. The distorting factor in all of this is the Fed's QE."
The movement of money associated with QE has been impressive. While the Fed has pumped roughly $353 billion into the U.S. economy this year in an effort to revive growth, investors have poured $150 billion into global emerging markets over the same period, according to the Institute of International Finance Inc., a global trade group for the banking industry.
Last year, Asia accounted for just over 70% of the global increase in foreign-currency reserves, according to central bank data and J.P. Morgan Chase & Co. estimates. But despite the buying by Asian central banks, most currencies in the region are rising, showing the intense impact on global financial markets of central banks' easing efforts.
Japan's yen has climbed more than 3% so far this year against the U.S. dollar, while the Korean won and Indonesian rupiah have each gained more than 4%.
China is an exception. The yuan is down 2.5% this year, though it rallied to its highest level since April ahead of Mr. Lew's visit. While economists expect Chinese foreign-exchange reserves to have hit nearly $4 trillion at the end of June, the quarterly pace of growth is expected to be just 1%. Reserves increased 3.3% in the first quarter from the last quarter of 2013.
The rising currencies are putting stress on the region's big exporters. Tuesday, in an unprecedented move for the company, Samsung Electronics Co. released a statement alongside its usual earnings guidance, which projected a 24% decline in second-quarter operating profit. In the statement, Samsung pinned the blame for the decline on the surging Korean won, which is at a six-year high, along with tough competition and weak sales. Samsung shares are down 11% in the past month.
More concerning is the kind of shift from inflows to outflows that roiled regional markets last summer, when the Fed first announced it would cut back on monetary stimulus. Fear that the tide of cash could rapidly recede is perhaps the strongest reason why Asian central banks keep hoarding reserves, even though economists say that most, and China in particular, have far more than they need to defend their currencies. Critics of the practice say that letting the currencies fluctuate freely with the market would better insulate economies from big movements of funds.
Last summer's big outflows from emerging markets show that having anything other than vast reserves may not help, said Nikolaos X. Panigirtzoglou, J.P. Morgan's global markets strategist. "Markets got more worried when Indonesia and Turkey started selling reserves," he said. "The market thinks this is something of a nuclear option, and when a nuclear weapon is used, it's not a good thing."
The growth in foreign-exchange reserves has affected bond yields as much as currencies. Central banks put almost all of their cash into government bonds, helping keep interest rates low even as global growth begins to tick up.
According to J.P. Morgan, foreign-currency reserves grew $720 billion last year and $750 billion in 2012. Including the $170 billion added to the total in the first quarter of this year, global foreign-exchange reserves are $11.9 trillion.
Add to that the even faster growth in sovereign-wealth funds, which J.P. Morgan estimates grew $900 billion in 2013 and $300 billion in the first quarter of this year, and government-controlled assets are adding more than $1.8 trillion a year. Total assets for foreign-currency reserves and sovereign-wealth funds are approaching $20 trillion, the majority of which are invested in government bonds.
"That means the abnormally low real interest rates will likely stay low for the foreseeable future," said Mr. Panigirtzoglou.
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