Is Asia still accumulating reserves in financial self defense?
I think it is fair to say that I profoundly disagree with this week's Economics Focus column in the Economist, and therefore, I suspect, with the underlying Genbert, McCauley, Park and Persaud paper.
- Presumably at some point, emerging Asia accumulated a large enough war chest to avoid a repeat of the Asian crisis. There are lots of points in between a reserves to GDP ratio of 5% and a reserves to GDP ratio of 50%. Goldman has done serious work on reserve adequacy, and concluded that Asia is over-reserved. The ADB reached the same conclusion. Ifzal Ali, the ADB's chief economist: "These reserves "have grown far beyond what is optimal level. It's basically a reflection of a lack of imagination, a lack of innovativeness and to some extent a lack of self-confidence." The World Bank also thinks Asia has more than enough reserves - too many actually. See p. 9 of this chapter of the World Bank's 2005 report on Global development Finance.
- China rode out the Asian crisis with far fewer reserves than its has now. No problems there. I fail to see how the Asian crisis explains China's decision to let its reserves rise from say 40% of GDP to 50% of GDP and be on a track where they will rise to 60% of GDP. The IMF's own chief economist has said China has enough reserves to protect against everything short of the apocalypse. China's reserves exceed its short-term debts by a ridiculous margin. Korea - which actually experienced a crisis in 1997 largely because it had too few reserves - has concluded it now has more than enough. Why hasn't China reached the same conclusion?
- The notion that China's exchange rate regime is OK because it has not changed for some time misses the point. The world has changed since 1997 -- and since 2001. Look at what has happened to Chinese exports since 2002. And look at what has happened to the dollar since 2002.
- Higher surpluses in oil exporting and commodity exporting regions normally would be offset by lower surpluses (or deficits) in oil importing regions, including much of Asia. That has not happened. Or at least it did not happen til this year for most of Asia, and still has not happened for China. The rise in the current account surplus of the oil exporters has largely been offset by the rise in the deficit of one oil importer -- the US -- and a lot of other countries also import oil.
- China's current account surplus is going to be quite large this year, and next year. Moreover, the increase in China's 2005 current account surplus was entirely predictable. See Morris Goldstein. Going forward, a large share of China's reserve accumulation will be explained by its current account surplus; moreover, China - which has attracted significant inflows of stable FDI - quite clearly could have run a current account deficit without taking on the financial risk that gave rise to the Asian crisis.
Look at the graphs on p. 2 and p. 5 of the new IMF WEO chapter on global and savings and investment; they offer a better baseline for sensible discussion.