from Follow the Money

Adjusting for valuation changes sometimes can make a big difference

June 12, 2007 11:41 pm (EST)

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The Wall Street Journal reports that the pace of Asian reserve growth fell in May.   They look at the change in the reported reserves (in dollars) of twelve Asian economies, including Japan.  But they don't adjust for valuation.

That matters.  The dollar rose against the euro (going from 1.36 to roughly 1.345) and pound in may, reducing the dollar value of Asia's existing euros and pounds.

After adjusting for valuation changes, I didn't see any fall-off in the pace of Asian reserve growth in May. 


Japan doesn't have large fraction of its reserves in euros or pounds, but with $900b or so in reserves, it still has a decent chunk of euros and pounds.  More importantly, Japan reports the market value of its long-term bond portfolio -- so its reported reserves tend to rise when US rates are falling and fall when US rates are rising.  Japan isn't actively intervening in the market right now, so all changes in its reserve reflect valuation changes (along with ongoing interest payments).   The underlying pace of Japan's reserve growth didn't change in May.   The swing from $6-7b in reserve growth in April to -4.5b in May reflects the impact of valuation changes.

Most other Asian central banks -- to the best of my knowledge -- value their bonds at face, so changes in US rates don't have an impact on their reported reserves.  But they do value their euros and pounds at the market rate, and some Asian central banks (India above all, but also Malaysia, Thailand and Singapore) have substantial euro and pound shares in their reserves.    Korea has -- again, as best I can tell -- substantially more dollars than euros and pounds.  But it has enough euros and pounds for a valuation changes to matter.

After adjusting for valuation changes, emerging Asia's reserve growth actually looks stronger in May than in April.   India, Malaysia and Korea all increased their intervention.   Korea has been talking tough (and intervening) for some time now.  And India jumped back into the market in a big way in the last week of May.   

One other thing. May Russian reserve growth was very, very strong.  If Brazil ever gets around to releasing its May data, its too will likely report strong reserve growth.   "Reserve growth" is no longer just an "Asia" story.  

Indeed, the striking thing to me is that both emerging Asia and the resource-exporting economies elsewhere in the emerging world are intervening quite heavily.  Or at least they were before the most recent bout of bond marketl turmoil, which seems to have reduced capital inflows to the emerging world.

p.s. ten-year Treasury yields briefly broke 5.3 today.  The recent move in the Treasury market has been brutal.  If this keeps up, the bond conundrum really will disappear ... Central bank must have a lot of cash on hand, cash that they presumably will be willing to put to work at some point.  But apparently not today.  

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