September 21st 2005
New report defends Asian forex reserves
Two prominent economists recently conducted a thorough analysis of Asia’s increasing foreign exchange reserves, the majority of which are held in US Treasury Securities, which are of course denominated min USD. The economists argue that the while the collective forex reserves of Asian nations have indeed skyrocketed in recent years, this does not necessarily signify that outright currency manipulation is taking place. Rather, they believe that these nations use their reserves as tools of monetary policy. For example, Japan may have grown its reserves to try to mitigate the possibility of deflation. Other nations view their reserves as a sort of contingency, to be used if the 1997 Southeast Asian economic crisis (which caused regional currency depreciation) repeats itself. China’s increasing reserves, argue the study’s authors, are largely a product of ‘hot money’ inflows, rather than a proactive attempt by China to hold down its currency. The Economist reports:
It is hard to accuse China of running a cheap-currency policy, since it passed up an opportunity to devalue the yuan at the time of the Asian crisis.
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