IMF urges Asia to curb huge foreign exchange surplus
IMF urges Asia to curb huge foreign exchange surplus
David Williams, Agence France-Presse, Washington
Emerging Asian economies have boosted foreign exchange reserves massively in 18 months, presenting a new menace to the global economy, the IMF warned Thursday.
Emerging Asia's reserves soared US$170 billion in 2002 to about $1 trillion, according to an International Monetary Fund study in the twice-yearly World Economic Outlook report.
The buildup accelerated this year, with Chinese reserves alone leaping $60 billion in the first half of 2003.
The expansion in reserves in Asia until 2002 could be explained by basic economics, including the need to cushion against shocks after the 1997 financial crisis, IMF chief economist Ken Rogoff said.
But since then the pace had sped to beyond anything warranted by the economy, resulting in a mountain of reserves, which created new risks, he told a telephone news conference.
"It is one thing to save for a rainy day, but one trillion dollars in reserve accumulation looks more like building Noah's Arc," Rogoff said.
According to the IMF study, a basic rule of thumb showed that countries' foreign exchange reserves can help shield their economies from shocks if the reserves are at least equal to short-term debt.
But in emerging Asian economies, the reserves were now more than five times the level of short-term debt.
"Some slowdown in the rate of accumulation may now be desirable," the IMF report said.
Most of the Asian reserves were held in low-interest bearing loans to industrialized nations such as U.S. Treasury bonds.
This was "an awfully expensive insurance policy" when emerging Asian governments typically had much higher interest paying loans of their own on the markets, Rogoff said.
"Some day, Asian central banks may wake up to their massive unproductive reserve assets and begin to diversify more, out of dollars, and possibly out of cash altogether," he warned.
"The larger their reserves grow, the greater the impact this diversification is going to have. If diversification takes place too suddenly, there is the danger that Asian central bank funds, built up partly to insure against hot money private capital flows, will themselves become the hot money of the future."
Many Asian countries accumulated foreign exchange reserves as they intervened in the markets to prevent a rise in their currencies against the weakening U.S. dollar.
China, in particular, is coming under massive U.S. pressure to let the yuan float. U.S. exporters blame an undervalued yuan for creating a record Chinese trade surplus with the United States.
"It would be helpful for countries with managed floats to intervene less in the foreign exchange markets and for some countries with fixed exchange rates -- notably China -- to gradually move to greater flexibility, as has long been advocated by the IMF," the Fund report said.
It warned that the Asian current account surpluses, boosted by the low exchange rates, were the counterpart of U.S. deficits.
The United States is running a huge current account shortfall, the widest measure of financial dealings with the outside world, amounting to $136.1 billion in the first quarter of 2003 alone.
At some point, many analysts predict, the United States will have make an adjustment to help finance that deficit, likely leading to an even sharper decline in the dollar's value.
"There is a strong case for broadly sharing the burden of adjustment to the inevitable closing of the U.S. current account deficit, and somewhat more flexible exchange rates in Asia has to be considered as part of any medium-term solution," Rogoff said.