Taiwan Central Bank Denies Report of Plan to Cut Dollar Assets

Section:

Dollar's Fall Tests Nerve of Asia's Central Bankers

By James Brook and Keith Bradsher
The New York Times
Saturday, December 4, 2004

http://www.nytimes.com/2004/12/04/business/worldbusiness/04banker.html

TOKYO, Dec. 3 -- As Americans embark on another
season of debt-supported holiday spending, they
might want to give thanks that Masatsugu Asakawa
is still buying in America too.

Mr. Asakawa, 46, is the top official at the Finance
Ministry here responsible for managing the largest
portfolio of United States government securities in
the world, worth a staggering $720 billion. As the
dollar has slumped this fall, many investors have
started to worry that Mr. Asakawa and his
counterparts elsewhere in Asia will be tempted to
pare their holdings, perhaps causing the currency
to plunge much further and setting off a round of
interest rate increases in the United States that
could send the global economy into a tailspin.

But Mr. Asakawa, at least for now, says that he
intends to keep right on adding American holdings
to Tokyo's portfolio.

"We've heard the rumors in the last few days that
the Chinese guys, the Indian guys, the South
African guys are diverting from dollars," Mr.
Asakawa said. "We have no plan at all to divert
from our dollar-denominated assets."

Still, Mr. Asakawa admits that he has not been
sleeping so well lately.

"This thing wakes me up; it is terrible," Mr.
Asakawa said in excellent American-accented
English -- he once studied at Princeton -- as he
toyed with a blue plastic portable currency
monitor. After hours, the wireless device beeps
by his bedside whenever the dollar strays
beyond a set range. "Fortunately," he said, "my
wife is very understanding."

Mr. Asakawa has been waking up a lot more often
because the long-running symbiotic relationship
between Asia and the United States has started to
fray.

For years, manufacturers in Japan, China, South
Korea, and Taiwan have been selling far more to
Americans than Asians have been buying from
the United States. As a result, Asians have
accumulated huge quantities of foreign exchange,
which they have used mostly to buy American
government securities.

By doing so, they helped keep interest rates in the
United States low and the dollar relatively strong.
That allowed Americans to borrow cheaply and fill
their shopping bags with yet another load of
well-priced goods imported from Asia. Low interest
rates also enabled Washington to readily finance
the federal government's gaping budget deficit.

But as borrowing by the United States from abroad
has soared this year to $620 billion, a record 5.7
percent of overall economic activity, many
foreigners have become reluctant to keep
accumulating dollars at the same pace. That has
left officials like Mr. Asakawa and others at
central banks elsewhere in Asia holding America's
pursestrings.

Japan's total stockpile of foreign currency, at $817
billion, is still the largest in the world, but China,
which now owns about $600 billion, is catching up
fast.

Among countries that are accumulating dollars --
especially China -- grumbling is on the rise that
Washington should do more to protect the value
of their investments by cutting the budget deficit
and adopting other policies to slow or reverse the
dollar's decline.

"Shouldn't the relevant authorities be doing
something about this?" asked Prime Minister
Wen Jiabao of China at a conference in Laos last
Sunday.

In Beijing these days, one of the fastest-growing
fortunes the world has ever seen is managed by
fewer than two dozen traders, chosen for showing
mathematical brilliance at China's top universities.

Generally lacking any financial experience outside
China, they sit at trading stations around a gold
stand bearing a jeweled globe, 2 feet in diameter
and with seas of lapis lazuli, in a rented room on
the fourth floor of an insurance building.

Most of the money in China's central bank coffers
has accumulated in the last four years, the product
of an investment torrent washing over China and the
ever-expanding flood of goods pouring out of
Chinese factories.

As in Japan and China, small groups of civil servants
in Taiwan and South Korea are struggling to invest
sizable foreign currency reserves of $235 billion and
$193 billion, respectively. For years, all four
countries have held the bulk of their reserves in the
Treasury bills, notes, and bonds that finance the
federal budget deficit, leaving American consumers
and companies free to spend more on other things
and invest their spare cash in more promising
ventures.

Together, these Asian institutions are responsible
for holding roughly 40 percent of the American
government's public debt.

In contrast to Japan, China's money managers,
while selling little of their existing Treasury holding,
have not been buying much more. China's foreign
currency reserves rose by $111.3 billion in the first
three quarters of the year, according to official
Chinese data. But its Treasury holdings, American
filings show, climbed by only $16.4 billion.

Instead, officials at the State Administration of
Foreign Exchange in Beijing have been seeking
higher yields by plowing billions of dollars a month
into bonds backed by mortgages on houses
across the United States, according to bankers
who help Beijing manage the money. By helping
keep mortgage rates from rising, China has come
to play an enormous and little-noticed role in
sustaining the American housing boom.

The proportion of China's hoard in Treasury securities
has dropped to about 35 percent, they say, compared
with the roughly 90 percent of Japan's foreign
currency reserves still parked in Treasury securities.

Some bankers and economists say that
dollar-denominated securities over all represent a
slowly declining share of China's recent purchases.
But no figures are available on how quickly Beijing
may be shifting to other currency holdings, so its
effect on the underlying demand for dollars is
unclear.

Still, the American reliance on foreign money and
the investment decisions of bankers halfway
around the world underline a serious risk for the
economy: What would happen if this deep
investment pool was used to fill coffers elsewhere
in the world, perhaps in Europe or in Asia itself?

With the dollar trading in recent days around
five-year lows against the Japanese yen, Russia's
central bank unnerved currency markets last
week by revealing that it was considering
diversifying from dollars to euros.

A Chinese central banker, Yo Yongding, also
caused a brief dive for the dollar on Nov. 26 by
making remarks that were initially translated as
a statement that Chinese dollar holdings were
dropping. The banker later issued a statement
that he had noted only that the value of
Chinese-held Treasuries had dropped with the
falling value of the dollar.

For all the interest in the other players, currency
markets remain focused on Japan, which has
aggressively bought dollars, doubling its investment
in Treasuries over the last two years. During a
15-month period that ended in March, the
Japanese government bought $340 billion of
dollar-denominated securities with its yen. The
buying spree so stunned speculators that Japan
has not had to intervene in the markets since.

But now with Japan's huge stake in the dollar
losing value, the question is: What will Tokyo do next?

The problem for Japan is that it is in so deep that to a
large degree it is chained to its American debtor.

"Imagine that tomorrow people hear, 'Hey, Japan has
decided to divert from U.S. dollars to euros,'" Mr.
Asakawa said. "That would create a hugely
undesirable impact on the U.S. Treasury market, and
we have no intention at all to make an unfortunate
impact on the U.S. Treasury market."

Any selling move by Japan would move the entire
market -- and cut further into the value of Japan's own
portfolio.

Richard Koo, chief economist for the Nomura
Research Institute, is one of many financial
soothsayers in Tokyo who work to divine the thinking
behind the shabby door on the fourth floor of the gray
pre-World War II Finance Ministry building marked
Director of Foreign Exchange Markets.

As he sees it, anything Japan might do to slow its
dollar purchases would only create a self-inflicted
wound. "If they could move it all out of dollars in one
day, I am sure they would do it in an instant," Mr.
Koo said. "But if they move 10 percent and the dollar
goes down 20 percent, they are stuck with 90
percent of the portfolio worth 20 percent less."

Others in Japan are not happy about how much the
dollar has already weakened. Toyota, Japan's largest
company and its biggest exporter, complains that for
every 1-yen gain against the dollar, the company's
annual profit falls by 20 billion yen, currently $195
million. With Japan's economic recovery still lagging,
its dollar buying serves to help keep its exports more
competitive.

This week Japanese officials have been talking up
the dollar and leaving the door open to a resumption
of specific dollar-strengthening moves. On Wednesday
Mr. Asakawa's boss, Hiroshi Watanabe, vice minister
for international affairs at the Finance Ministry,
responded to a question at a news conference about
intervention, saying, "There is nothing to limit our
actions; there are no such concerns."

Japan and China hold too much American debt to be
able to diversify discreetly. Instead, they are urging
the Bush administration, in public and private, to get
the American budget into better balance and to
improve American saving rates.

"What China and Japan are trying to do is say, 'Please
get back on track with fiscal reform,' " said Robert A.
Feldman, chief economist for Morgan Stanley Japan.

China, more than many countries, treats its foreign
currency reserves as not just a way to control the value
of its currency in international markets but also as a
form of national savings. That is one reason its traders
are encouraged to take greater risks in search of higher
returns.

China used $45 billion from its stash to bail out the
state-owned Bank of China and the China
Construction Bank last winter. People close to Chinese
policy makers predict that another $50 billion to $60
billion will be used this winter to bail out the much
larger Industrial and Commercial Bank of China, also
state-owned, and possibly a smaller sum to help the
Agricultural Bank of China.

The Chinese government currency traders, bankers
say, have refrained from the kind of highly speculative
trading that led to the $550 million in losses disclosed
this week by China Aviation Oil (Singapore) Corp., which
is majority owned by a state-run Chinese company. But
the fees and commissions associated with doing
business with the Chinese have prompted many big
Western banks to set up special trading teams in Hong
Kong just to handle transactions for Beijing.

An important job for such teams involves taking Chinese
traders to dinner, Western bankers say, as the Chinese
are not allowed to accept gifts. So fee-hungry bankers
fly regularly to Beijing from Hong Kong -- some making
the trip practically every week -- to take traders out for
lavish evenings.

For some, one banker said, this duty can become
wearisome. The Chinese traders enjoy bowling, he s
aid, but they also have a reputation for wanting to
attend Mandarin romantic operas, an acquired taste
at best.

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