Monday, April 19, 2021

The inflows into Asia reinforce scrutiny of countries ’manipulation of currency rates

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410 billion dollars, an increase in the reserves of the 10 largest economies in Asia, excluding China

It could be a cause for celebration, especially that Taiwan It has already shown an outstanding economic performance in a world where the Corona epidemic is spreading, and this remarkable performance continues, thanks to the sales of semiconductors.

Orders on semiconductor exports increased by 49% in the first two months of 2021, compared to 2020, according to data released on March 22, and there is only one hurdle.

The export power has become embarrassing for officials in Taipei because it attracts unwanted attention. The US Treasury has already placed Taiwan on a “watch list” for countries it suspects of manipulating their currency exchange rates, especially as the country’s prosperity increases intense surveillance.

If there is any consolation for Taiwan, it is that it is not the only country to be placed on such a list, as foreign exchange reserves have increased throughout Asia, which is a good indication of the possibility of intervention in the currency.

With the exception of China – where the data is difficult to interpret – foreign reserves in the ten major Asian economies rose by about 410 billion dollars last year, which is the largest annual jump ever, according to the calculations of the British “The Economist” magazine.

Some other countries, including Taiwan, are part of the Asian Manufacturing Complex, which has benefited from resilient external demand for electronics and consumer goods amid the lockdowns imposed to control the epidemic.

In Vietnam, for example, exports grew 6.5% last year, and with its Vietnamese dong loosely linked to the dollar, many of these commercial receipts make their way into official foreign exchange reserves, as the central bank issues the Vietnamese dong to buy excess dollars from commercial banks. At a semi-fixed exchange rate.

Other countries recorded large net currency flows under more difficult conditions. Exports in the Philippines and India declined, but imports also fell more sharply, so both countries switched from current account deficits to posting large surpluses last year.

The controversial question revolves around whether the accumulation of reserves is bad from a global perspective, but the idea here is that the reserves stem from efforts to suppress the appreciation of the currency, and therefore it represents a trade policy known as “impoverishment of the neighbor”, because countries work to boost their exports at the expense of Others.

However, there is also another thing about reserves, which is that small open countries can aim to limit disruptive exchange rate fluctuations, not keep the currency rate at low levels.

As for developing countries, reserves are considered a pillar of liquidity if foreign capital dries up, as happened in many countries last year.

This disparity is significant in Asia, where it seems absurd to blame some poor countries.

During the “gradual tantrum” in 2013, when a sell-off spread in emerging markets over fears of tightening US monetary policy, India and Indonesia were among those seen as weak due to their reliance on external financing, but large safety margins should make it more stable. .

If these countries manage to control the epidemic this year, it is possible that their imports will recover and their current account surpluses will shrink, and the increase in their reserves will appear as a health deviation, not a malicious trend.

Gains in richer countries, especially China, South Korea and Taiwan, appear to be the object of more objection, and they seem to be aware of this.

China is considered one of the most noticeable countries, especially since it has taken steps to hide its good luck, as its central bank’s foreign reserves have increased by $ 97 billion since the beginning of 2020, which led to a relatively modest increase of 3%.

There was also a noticeable jump in net foreign-currency-denominated assets in China’s banking system, and they rose by $ 133 billion, or 80%, in the first nine months of 2020, so one possibility is that commercial lenders acted as agents to manage reserves.

Currency dealers in China say that the large state-owned banks were already major buyers of dollars at the moment of strong yuan.

The best defense for these three countries was their desire to check how quickly their currencies rose, especially given the uncertainties about the epidemic.

Even with large foreign reserves, the currencies of China, South Korea and Taiwan have risen by about 5% against the US dollar since mid-2020, and they are set to face more upward pressure if the export boom continues.

The article Inflows into Asia enhance scrutiny of country manipulation of currency rates was written in the Al-Borsa newspaper.

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