Wednesday, March 02, 2005

Asian central bank reserves

Brad DeLong's Website: Notes on Blanchard, Giavazzi, and Sa, "The U.S. Current Account and the Dollar": "But isn't it more likely that when the peg collapses Asian central banks' desires to hold dollar assets will be severely diminished, and that the foreign demand curve for dollar-denominated assets will move back to its original un-shifted-out position? In that case we have:"

Also a very good discussion on recent practice by the Chinese central bank at Brad Setser's excellent site

I think that the scale of USD buying by the Chinese central bank highlights the size of the inflow into China. Some of this is clearly speculative given the widespread talk that there will be an eventual revaluation. I think that it is pretty clear that the Chinese have to purchase EUR-USD just to maintain the existing balance of their reserves and that they, along with other Asian central banks, are more concerned about exports that an eventual loss on the FX reserves. Even if there is an eventual crisis and the USD starts to collapse as the Chinese peg is relaxed, it is hard to imagine Asian central banks adding to the crisis by selling USD reserves. It would be like the Bundesbank selling ITL or GBP and buying NGL during the ERM crisis - financially astute, but politically embarassing.

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