SATURDAY, FEBRUARY 22, 2003
Asia happy to fund US deficit to stay competitive
REUTERS
SINGAPORE: Asia, keen for US consumers to buy its goods, finds itself funding the US trade deficit to ensure its own growth -- and at the same time putting a floor under the US dollar to preserve the region's competitiveness.
The US export market has become a priority for Asia as the region fights worries of a global slowdown, deflation, and the competitive threat of China,
The US trade deficit for 2002 hit a record $435.2 billion, data showed on Thursday. The trade deficit with China topped $103 billion, and with Japan it was $70 billion.
"This figure only highlighted the need for the US to attract more capital in order to fund its expanding current account deficit, a difficult proposition in a period of high risk aversion," UBS Warburg currency strategist Naomi Fink said.
A large trade deficit normally pressures the currency of the debtor nation, while those with surpluses, such as many Asian economies, normally see their currencies tending to rise.
And to an extent that was true for Asian currencies, which were stronger against the US dollar on Friday.
But while the Australian dollar rallied to a 2-½ year high and the New Zealand dollar jumped to its highest since May 1999 -- even though both countries are running current account deficits -- most Asian currencies stood below end of 2002 levels, and all were well below last year's highs.
One of the factors keeping a lid on Asian currencies has been the rapid growth in Asian central bank foreign reserve holdings.
"To a degree that is one aspect of it, (central banks) are trying to slow things down. You can see that to the extent that their foreign exchange reserves keep rising," Claudio Piron, foreign exchange strategist at Standard Chartered Bank, said.
Asia includes the five largest holders of foreign reserves in the world -- Japan, China, Taiwan, Korea and Hong Kong.
At the end of 2002, the five held $1.15 trillion of foreign currency reserve assets, an increase of over $200 billion dollars in one year. The net position of the European Central Bank and euro zone central banks was about $252 billion at end 2002.
And building reserves is not just about keeping currencies from rising. In a region still scarred by the financial crisis of 1997/98, reserves are also seen as one way of heading off another meltdown.
"Part of it is perhaps is a certain mentality that a lot of central banks in Asia have: more is always better when it comes to reserves," J.P. Morgan Chase Bank economist Rajeev Malik said.
"But it also indicates that they have been intervening and trying to manage exchange rates overall."
In "recycling" national current account surpluses, central banks also add money to their already flush domestic markets as they absorb the foreign currency into their reserves.
With equities unattractive and local bond markets not offering the depth or yield investors want, excess banking funds largely head offshore. Some goes to the higher yields of Europe, Australia and New Zealand, but most heads to US markets.
"Asian countries have a lot of liquidity in their banking systems that cannot be fully utilised. Quite a lot of this money is parked in US dollar assets," said Eddie Wong, Asian chief economist at ABN Amro.
Analysts said there are some obstacles that could limit Asia's ability to underwrite the US deficit and cap their currencies, no matter how much they want to.
The risk of a Gulf war, tensions in North Korea, and worries of slower global growth threaten to weaken demand for exports as rising oil costs push up their import bills -- lowering the surpluses that can be used to fund the US deficit.
"I think we will see the Asian currencies pick up against the dollar," Standard Chartered's Piron said.
"Our thinking is the geopolitical risks will do more to harm to the US than anyone else. It will increase the risk aversion to such a degree that it will restrict the amount of funding for the US current account deficit -- even from Asia," he said.
"It's not just a question of willingness to lend money to America, which Asia will do and investors will keep doing. It's just a question of being able to sustain the rate at which the inflow needs to keep coming in."
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