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China, Greenspan rub
salt
in dollar
wound
The US dollar was
struggling near a two-month low against the euro
on Friday as the market braced for fresh trade
data that were likely to show a further widening
of the trade gap. As if this weren't trouble
enough for the besieged greenback, US Federal
Reserve chairman Alan Greenspan stirred up the
market Thursday night saying foreign investors
would reduce their US asset holdings at some
point, while new findings came to light that China
is indeed doing so.
Saying he is not
"overly" concerned about the record US trade gap
or heavy consumer debt, Greenspan said the budget
deficit gives him the shivers. The US current
account deficit widened to a record US$164.7
billion from July through September, the most
recent figures available, equivalent to 5.6% of
gross domestic product (GDP). "Our current account
deficit and household debt burdens do not strike
me as overly worrisome, but that is certainly not
the case for our fiscal deficit," Greenspan told
the Council on Foreign Relations in New York. "Our
fiscal prospects are, in my judgment, a
significant obstacle to long-term stability,
because the budget deficit is not readily subject
to correction by market forces that stabilize
other imbalances."
According to the high
priest of finance, international investors have
only modestly shifted their portfolios away from
dollar assets so far. But he warned that they
might at some point decide their portfolios are
too dollar-centric, ominously adding that if the
dollar keeps dropping, foreign exporters may start
looking elsewhere.
Greenspan's comments
came close on the heels of Japanese Prime Minister
Junichiro Koizumi's startling remark on Thursday
that Japan needs to diversify its foreign-exchange
reserves, reviving fears of Asian central banks
cutting their giant dollar reserves. Any move by
Japan, which has the largest foreign-exchange
reserve in the world ($840 billion), to reduce its
dollar holdings could be disastrous for the
greenback. The dollar has already been dropping
against the yen for four straight weeks now.
Koizumi's statement, though later qualified by his
finance minister, will only prolong the agony.
US dollars accounted for 63.8% of the
world's currency reserves at the end of 2003, down
from 66.9% two years earlier, according to
International Monetary Fund (IMF) figures released
last April. A survey this January commissioned by
the Royal Bank of Scotland Plc and conducted by
London-based Central Banking Publications Ltd
showed that central banks across the world were
boosting euro holdings. Almost 70% of the 56
central banks surveyed said they had increased
exposure to the euro.
Citing a more recent
finding, Asia Times Online reported on Thursday
(Dollar catching Asian
flu) that Asian central banks have been
quietly switching their dollar holdings to
regional currencies for at least three years
now. A study by the Bank of International
Settlements (BIS), which acts as a bank for the
world's central banks, shows that the ratio of
dollar deposits held in Asian offshore reserves
declined to 67% in September, down from 81% in the
third quarter of 2001. India was the biggest
seller, reducing its dollar assets from 68% of
total reserves to just 43%. China, which directly
links the yuan to the dollar and is under US
pressure to allow a freer movement of its
currency, trimmed the dollar share from 83% to 68%
over the same period.
Bloomberg reported
on Friday that according to an estimate by Lehman
Brothers Holdings Inc, China's central bank has
been cutting the share of its currency reserves
held in dollars and replenishing them with euros.
Some 76% of China's reserves were in dollars last
year, down from 82% in 2003, said Lehman, the
fifth-largest US securities firm.
There
has been debate in China on whether it at all
needs such a huge foreign-exchange reserve.
China's forex chief, Guo Shuqing, a member of the
National Committee of the China Political
Consultative Conference (CPCC) and director
general of the State Administration for Foreign
Exchange Management (SAFEM), said that as an item
of international payments, the growth of the
foreign-exchange reserve is the result of the
macroeconomic operation, but not the objective
China is particularly pursuing. An adequate
foreign-exchange reserve is favorable for payment
abilities, comprehensive national power and
creditworthiness, reducing risks of reform and
safeguarding financial security, he said.
Guo pointed out, however, that excessive
growth could be detrimental. In a rare and stern
warning against the inflow of speculative funds,
or "hot money", in the name of investment, he told
local governments not to lure foreign investment
"haphazardly". Regulators have been playing down
the amount and impact of hot money over the past
year, but Guo said China might see "no end of
trouble in the future" unless local governments
are acutely aware of risk mitigation in soaking in
foreign funds.
"China pays great attention
to speculative funds," Guo said in an interview
with Xinhua on the sidelines of the annual session
of the National Committee of the Chinese People's
Political Consultative Conference, China's top
advisory body. "Foreign-exchange administration
departments and other macroeconomic departments
are investigating the issue and will punish
illegal activities severely."
China's
foreign-exchange reserve added as much as $206.7
billion last year alone. Guo said the overall
inflow of capital is "normal and legal" and
reflects the "market scenario", but there are also
some "worrisome" problems. "Fake foreign
investment" is actually being used to purchase
yuan-denominated assets and commercial housing on
speculative purpose, he noted. Hot money has
pushed housing prices to a very high level, making
cities look "prosperous" but doing no good to the
investment climate, as it leads to higher living
and business costs. Typically, this means great
risks for local financial institutions,
enterprises and even individuals. When the
real-estate bubble bursts, they will suffer from
huge losses, Guo said. Hot money has also sneaked
into China under capital accounts or based on no
real trade, he claimed.
Guo said China's
foreign-exchange reserve, second only to Japan's,
is quite enough to pay the country's debts. But
its debts in foreign currency may snowball to an
amount that engenders "systematic risks". He
revealed that newly added foreign-exchange
reserves last year include $60.6 billion in
foreign direct investment, $32 billion in trade
surplus, $30 billion from foreign-exchange
clearing under the account of imports and exports
by enterprises, $35 billion in foreign debts, more
than $10 billion in service trade surplus, $30
billion in individual asset transfer and earnings
being brought about, and more than $10 billion in
securities investment, among others.
Mountains of foreign-exchange reserves
have long been an excuse used by some countries,
especially the United States, to demand
appreciation of the yuan, which now floats against
the US dollar within a narrow band. But Premier
Wen Jiabao reiterated in his government work
report last week that China would keep the yuan
"basically stable".
(Asia
Pulse/XIC) |
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