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.