Massive capital inflows raise forex reserves
It is the massive capital inflows that cause the surge in foreign exchange reserves in Hong Kong, the Chinese mainland and Japan, which kicked started when the US dollar embarked on a two-year slump, the latest issue of the Bank of China (Hong Kong) Limited's monthly Economic Review said.
When compared to levels reached during the Asian financial crisis, there should be little doubt the heightened financial security brought by the hefty accumulation of forex reserves, even though a consensus has yet to be reached on the proper level of such reserves, it said.
It said that due to structural differences in financial systems and economic development phases, capital inflows and the subsequent forex reserves accumulation have far different impacts on economic growth and macro policy decisions. Consequently, policy response should not be uniform.
It is in this regard that mainland has its own rationale to resist the RMB revaluation pressure from the US election politics and conducts financial and banking reforms according to its own mandate, it said.
The note further suggests that Asia's rapid accumulation of forex reserves does not come free if it strengthens an economy's financial position. An economy with higher interest rates than the US bears higher opportunity costs, which dictates the composition of the reserve portfolio.
Mainland has invested its reserves into the US treasuries at a ratio far lower than Japan and Hong Kong. This is partly because the RMB interbank rates as well as mainland's yield curve are higher than the US counterparts, implying higher opportunity costs. As a result, mainland exhibits less interest in the lower yielding US treasuries as compared to Japan and Hong Kong, it said.