For­eign ex­change re­serves are climb­ing across the re­gion with In­dia’s forex re­serves are set to hit a new high of $400 bil­lion

Financial Chronicle - - FRONT PAGE - ANIR­BAN NAG & ENDA CUR­RAN

Across much of Asia, forex re­serves have never been stronger. In­dia’s forex re­serves are set to hit a new high of $400 bil­lion, enough to cover a year of im­ports.

ACROSS much of Asia, for­eign cur­rency re­serves have never been stronger. In­dia’s forex re­serves are set to hit a new high of $400 bil­lion, enough to cover a year of im­ports, while hold­ings of in­ter­na­tional cur­ren­cies in South Korea, Tai­wan, Thai­land and In­done­sia are all at record lev­els.

China’s re­serves – the world’s big­gest – posted a sev­enth straight gain in Au­gust to $3.09 tril­lion, help­ing to re­verse a near $1 tril­lion de­cline.

Steady cap­i­tal in­flows from yield hun­gry in­vestors and the weaker dol­lar have swollen cof­fers, po­si­tion­ing Asia’s cen­tral banks to tackle any vo­latil­ity trig­gered by the Fed­eral Re­serve’s plan to shrink its bal­ance sheet – de­tails of which are ex­pected to be an­nounced on Septem­ber 20.

In­deed, cen­tral banks in In­dia and In­done­sia have been so con­fi­dent in their in­oc­u­la­tion from the Fed’s tight­en­ing that they both cut in­ter­est rates last month.

“It is a de­lib­er­ate strat­egy to but­tress de­fenses as the Fed looks set to with­draw liq­uid­ity, rais­ing risks for cap­i­tal flows into emerg­ing mar­kets,” said Fred­eric Neu­mann, co­head of Asian eco­nomic re­search at HSBC Hold­ings Plc in Hong Kong. Asia’s cen­tral banks have good rea­son to be on their toes. A sig­nal by then Fed chair­man Ben Ber­nanke in 2013 of a curb to his huge bond-buy­ing pro­gramme threat­ened to suck cap­i­tal away from the re­gion and piled down­ward pres­sure on cur­ren­cies.

The Re­serve Bank of In­dia was among the hard­est hit in the ‘taper tantrum’ as spec­u­la­tors dumped the ru­pee.

Con­di­tions have since im­proved. Yield-hun­gry in­vestors are chas­ing In­dia’s high lo­cal real rates, sta­ble ru­pee and the prom­ise of more eco­nomic re­forms.

For­eign­ers have poured more than $20 bil­lion into In­dian debt and $6.5 bil­lion into stocks so far this year, help­ing the ru­pee rise more than 6 per cent against the dol­lar. In­dia re­ceived $60 bil­lion in for­eign di­rect in­vest­ment (FDI) in the year to March 2017, mak­ing it one the largest re­cip­i­ents of in­flows.

And it’s a sim­i­lar story for much of the re­gion, where the com­bi­na­tion of ro­bust eco­nomic growth and gen­er­ous yields are lur­ing in­vestors even af­ter four Fed rate in­creases.

“Asia still of­fers high rates of re­turns while among the G-3 cen­tral banks, in­fla­tion is yet to take off,” said Rad­hika Rao, econ­o­mist at DBS Bank in Sin­ga­pore.

In­done­sia – where mem­o­ries of the Asia fi­nan­cial cri­sis still linger – has built its for­eign re­serves to al­most $129 bil­lion. As of the end of Au­gust, the coun­try had re­serves equiv­a­lent to 8.6 months of im­ports and gov­ern­ment ex­ter­nal debt re­pay­ments.

Thai­land’s re­serves have climbed to a record $196 bil­lion as in­flows surged. In­deed, the na­tion’s ex­ter­nal po­si­tion is so strong it’s be­com­ing a headache for pol­icy mak­ers.

South Korea’s rose to a record $384.8 bil­lion at the end of Au­gust. That’s one rea­son the coun­try’s pol­icy mak­ers re­main con­fi­dent of the econ­omy’s re­silience de­spite risks posed by the Fed and ten­sions with North Korea.

Ja­pan’s re­serves have re­mained sta­ble at around $1.2 tril­lion since in­ter­ven­ing in 2011 to stem the yen’s ap­pre­ci­a­tion. Un­like other parts of Asia, Ja­pan’s decades of eco­nomic stag­na­tion has eroded the yields of­fered by the na­tion’s se­cu­ri­ties.

China’s re­serves ap­pear to be on an up­ward tra­jec­tory again, helped in part by the weaker dol­lar and the yuan’s sur­pris­ing strength this year. But there are signs that of­fi­cials feel the cur­rency’s gains have gone far enough. One rea­son money is flow­ing into Asia is ev­i­dence of de­cou­pling be­tween cen­tral banks in the re­gion and the Fed.

“In pre­vi­ous US tight­en­ing cy­cles, mon­e­tary poli­cies in Asia had been largely in sync with the Fed­eral Re­serve’s,” said Sian Fen­ner, lead Asia econ­o­mist at Ox­ford Eco­nomics in Sin­ga­pore. “But not this time,” Fen­ner said.

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