Two prominent economists recently conducted a thorough analysis of
Asia’s increasing foreign exchange reserves, the majority of which are
held in US Treasury Securities, which are of course denominated min USD.
The economists argue that the while the collective forex reserves of
Asian nations have indeed skyrocketed in recent years, this does not
necessarily signify that outright currency manipulation is taking place.
Rather, they believe that these nations use their reserves as tools of
monetary policy. For example, Japan may have grown its reserves to try
to mitigate the possibility of deflation. Other nations view their
reserves as a sort of contingency, to be used if the 1997 Southeast
Asian economic crisis (which caused regional currency depreciation)
repeats itself. China’s increasing reserves, argue the study’s authors,
are largely a product of ‘hot money’ inflows, rather than a proactive
attempt by China to hold down its currency. The Economist reports:
It is hard to accuse China of running a cheap-currency
policy, since it passed up an opportunity to devalue the yuan at the
time of the Asian crisis.
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