Bangkok--Dec 2--Aziam Burson-Marsteller
Gauging Asian Foreign Exchange Intervention
It is too early to conclude that the Asian region as a whole has stopped
forex intervention.Foreign exchange (forex) intervention by most Asian central banks is shrouded in secrecy, yet is centre stage because of its scale. Central banks have been selling their local currency and buying foreign assets, mainly, it seems, US long-term securities, which has kept Asian currencies artificially weak, and helped to "turbo charge" US monetary policy by keeping long-term rates lower than they would have been otherwise. Asian currencies have recently started to appreciate, and we expect much more appreciation next year. However, while it is likely, it is not certain that Asian currency appreciation means that Asian central banks will be scaling back their forex intervention. If Asia's balance of
payments surplus increases (for example, due to strong speculative capital inflows), it is possible that Asian currencies appreciate and that forex
intervention increases. Unfortunately, measuring the amount of Asian forex
intervention in general, and Asian demand for US long-term securities in particular, is fraught with data limitations. Below, we attempt two approximate methods.
Forex reserves measure the cumulative net purchases of foreign exchange by a central bank, which for Asian countries are mostly held in US$ and
invested in US long-term securities. Data on Asian forex reserves are available at a high frequency (weekly or monthly) and are also timely (typically a one-month lag). But there are some shortcomings in employing forex reserves to gauge forex intervention. The changes in forex reserves are also influenced by the total earnings return on the existing stock of reserves, and by exchange rate valuation effects (since not all reserves are held in US$). Bearing these limitations in mind, Asia's total forex reserves surged by US$686bn in the 12 months to March to US$2.1tr, with Japan accounting for about half of the increase . However, since March, Japan's forex reserves have risen only slightly, from US$806bn in March to
US$818bn in October; China's on the other hand have continued to rise rapidly, from US$485bn in March to US$560bn in September In the rest of Asia, forex reserve accumulation slowed to a virtual halt after March, but since August has started to pick up again.
Another way to gauge Asia's forex intervention is to analyze US Treasury
monthly data on net foreign purchases of US long-term debt securities. We calculate the net Asian purchases of three types of US debt securities: Treasury bonds and notes; bonds of government corporations and federally-sponsored agencies; and corporate bonds.
Again, these data are not perfect. The transactions relate to the country
of location of the foreign buyers and sellers who deal directly with entities resident in the US, yet some foreign buyers and sellers may be custodians. So the data do not always indicate the foreign country that is the actual owner or issuer. Also, the transactions cover all foreign entities, not just central banks. And the data do not include net foreign purchases of short-term US debt, nor net foreign flows into US bank deposits. Despite these caveats, there is quite a good historical relationship between the monthly changes in Asia's total adjusted forex
reserves and Asia's total monthly net purchases of US long-term debt securities. However, in 1Q the increase in Asia's total adjusted forex reserves far exceeded the region's net purchases of US long-term debt securities. One possibility is that Asian central banks have been diversifying their forex reserves away from US dollars. But between April and August, the reverse occurred: Asia's net purchases of US long-term debt securities exceeded the increase in the region's total adjusted forex reserves.
With hindsight, there seems a more plausible explanation: in 1Q, Asian
forex intervention was so large that Asian central banks could not buy US long-term debt securities fast enough, leaving a large share temporarily parked in US bank deposits (which are excluded from the US Treasury data). Since March, Asian central banks seem to have been reallocating their forex reserves from US bank deposits to US long-term debt securities. In September, the latest month of data, Asia's total adjusted forex reserves rose sharply again (due to forex intervention in non-Japan Asia), and for the first time since March exceeded the region's net purchases of US long-term debt securities. Our overall conclusion: it is too early to claim that the Asian region as a whole has stopped forex intervention. Stay tuned for the October data. End.